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1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission File No. 0-27072
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
- ------------------------------ -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Phila., Pennsylvania 19103
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
--------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Each Class)
Units, each consisting of one share of Common Common Stock, $.001 par value
Stock, $.001 par value and one Class A Common Class A Common Stock Redeemable
Stock Redeemable Purchase Warrant Purchase Warrant
----------------------------------------- ----------------------------
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of Common Stock held by non-affiliates at March 10,
1997 was $51,017,273. For purposes of this calculation, it was assumed that
all Common Stock is valued at the closing price of the stock as of March 10,
1997.
The number of shares of the registrant's Common Stock outstanding as of
December 31, 1996 was 16,160,205.(Includes Common Stock contained in the Units)
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement which will be filed on or before April
30, 1996 with the Securities and Exchange Commission in connection with
Registrant's 1996 annual meeting of stockholders is incorporated by reference
into Part III of this Report as well as certain exhibits filed with the
Registrant's Registration Statement on Form S-1 (No. 33-93314).
2 PART I
ITEM 1. Business
General
Hemispherx BioPharma, Inc. (``HEMX or the ``Company'') is a
biopharmaceutical company using nucleic acid technologies to develop
therapeutic products for the treatment of viral diseases and certain cancers.
Nucleic acid compounds represent a new class of pharmaceutical products that
are designed to act at the molecular level for the treatment of human
disease. The Company's drug technology utilizes specifically-configured
ribonucleic acid (``RNA''). One of the Company's double stranded RNA drug
products, trademarked Ampligen , a parenteral drug product, is in advanced
human clinical development for various therapeutic indications. Based on the
results of pre-clinical studies and clinical trials, the Company believes
that Ampligen may have broad-spectrum anti-viral and anti-cancer activities.
Over 300 patients have received Ampligen in clinical trials authorized by the
U.S. Food and Drug Administration (``FDA'') at over twenty clinical trial
sites across the United States, representing the administration of more than
40,000 doses of this drug. Sales on a pre-approval, cost recovery basis have
been initiated in Belgium and are expected to start in Canada during the
second Quarter of 1997. HEMX is presently exploring additional distributor
relationships for Europe and the United States to set the stage for wider
market penetration. SAB/Bioclones, the Company's partner in certain
countries, is initiating trials of Ampligen in South Africa and Australia,
and is exploring clinical sites in the United Kingdom.
Ampligen is being developed clinically for use in treating three
anti-viral indications: chronic hepatitis B virus (``HBV'') infection (Phase
I/II clinical trial), human immunodeficiency virus (``HIV'') associated
disorders (Phase II), and myalgic encephalomyelitis, also known as chronic
fatigue syndrome (``ME/CFS'') (Phase II/III). The Company's business strategy
is designed around seeking the required regulatory approvals which will allow
the progressive introduction of Ampligen for HIV and ME/CFS followed by HBV
in the U.S., Canada, Europe and Japan. Ampligen has received Orphan Drug
designation from the FDA for four indications (AIDS, renal cell carcinoma,
chronic fatigue syndrome and invasive malignant melanoma). The Company is
also developing a second generation RNA drug technology, termed Oragen
compounds, which the Company believes offers the potential for broad spectrum
antiviral activity by oral administration.
The World Health Organization (``WHO'') estimates that there are approxi-
mately 300 million chronic carriers of HBV worldwide. More than 40% of the
persistently infected persons who survive to adulthood will die from
cirrhosis, liver cancer, or some other consequence of their infection. In the
U.S. alone, there are an estimated 1.25 million carriers. HBV is one of
several viruses that cause human hepatitis, or inflammation of the liver. The
Company conducted a Phase I/II clinical trial of Ampligen in the U.S. for
the treatment of chronic HBV infection at Stanford University and the
University of Pennsylvania. A significant reduction in viral components and
improvement in liver function was noted during the course of the Phase I/II
clinical trial and the drug has been generally well tolerated. At present,
interferon-alpha is the only approved product for the treatment of this
disease; however, 60% to 75% of patients with chronic HBV ultimately fail to
respond to interferon-alpha. The global sales of interferon are presently
estimated at more than $1 billion, largely for its use in liver infections.
The Centers for Disease Control (``CDC'') has estimated that
approximately one million people in the U.S. are infected with HIV, excluding
patients who have progressed to fully symptomatic AIDS. The WHO has estimated
that 30 to 40 million people will be infected with HIV worldwide by the year
2000. The Company is currently conducting a Phase II clinical trial of
Ampligen in the U.S. for the treatment of HIV infection. The drug is
designed to enhance the patient's own immune system, thereby fighting the
invasive viral agent more effectively and resulting in more durable long term
benefits.
ME/CFS is a condition recently recognized by the CDC and characterized by
unexplained fatigue or chronic illness for six months or longer for which no
cause has been identified after a thorough medical work-up. Although the CDC
is presently conducting studies to more exactly determine the rate of
incidence of ME/CFS, the CDC's latest estimate
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of the prevalence rate of this disease in the U.S. is in excess of 500,000
cases. The Company has entered into an agreement with a Canadian
pharmaceutical firm pursuant to which the Canadian company will provide
various services in connection with the distribution of Ampligen on a cost
recovery basis as authorized under the Canadian emergency drug release
program. Presently the Company is receiving revenues from sales of Ampligen
to patients in an open label clinical trial being conducted in Belgium. The
Company is currently discussing open-label and placebo controlled trials with
the FDA. The Company is unaware of any other new drugs which are under
development for treatment of ME/CFS. Today, ME/CFS accounts for a
significant portion of people entering chronic disability status, especially
in the western U.S. Thus, this presently untreatable illness constitutes a
significant impact on the overall cost of health care. Accordingly, the
estimate U.S. market for an effective treatment of ME/CFS is in excess of $1
billion annually.
The Company also has clinical experience with Ampligen in patients with
certain cancers, including renal cell carcinoma (kidney cancer) and
metastatic malignant melanoma. Based on estimates prepared by the American
Cancer Society, the Company estimates that approximately 25,000 new cases of
renal cell carcinoma were diagnosed in the U.S. in 1996. Based on estimates
prepared by the American Cancer Society, the Company believes that
approximately 34,000 new cases of malignant melanoma were diagnosed in the
U.S. in 1996. Data from the American Cancer Society and the World Health
Organization indicate that both the incidence and mortality from malignant
melanoma are rising steadily among white populations throughout the world.
In the past decade, the incidence of melanoma has increased faster than that
of any other cancer except lung cancer in women.
The Company was incorporated in Maryland in August 1966 under the name
HEM Research, Inc. and originally served as a supplier of research support
products. The Company was redirected in the early eighties to the development
of nucleic acid pharmaceutical technology and the commercialization of RNA
drugs. HEM was reincorporated in Delaware and changed its name to HEM
Pharmaceuticals Corp. in January 1991. In June, 1995, the Company became
Hemispherx BioPharma, Inc. The Company's principal executive offices are
located at One Penn Center, 1617 JFK Boulevard, Philadelphia, Pennsylvania
19103. The Company's telephone number is (215) 988-0080, and its WEB site is
HTTP// WWW.HEMISPHERX.COM.
THE PRODUCTS
Nucleic Acid Pharmaceuticals
The Company believes that nucleic acid compounds represent a potential
new class of pharmaceutical products that are designed to act at the
molecular level for the treatment of human disease. There are two forms of
nucleic acid: deoxyribonucleic acid ("DNA") and ribonucleic acid ("RNA"). DNA
is a group of naturally occurring molecules found in chromosomes, the cell's
genetic machinery. RNA is a group of naturally occurring informational
molecules which orchestrate a cell's behavior and which regulate the action
of groups of cells, including the cells which comprise the body's immune
system. RNA directs the production of proteins and regulates certain cell
activities including the activation of otherwise dormant cellular defenses
against viruses and tumors. To date, the Company has focused its efforts on
developing two classes of RNA pharmaceuticals, Ampligen, a high molecular
weight double-stranded intravenous drug, and Oragen, low molecular weight
single-stranded drugs intended for oral administration.
Although there are many competitive approaches to anti-viral and
anti-cancer therapies, the Company has taken an approach which it believes
appears to hold a great deal of promise. By activating the human body's
immune system through naturally occurring immune pathways, the Company's lead
drug compound Ampligen is designed to avoid many of the pitfalls of other
anti-viral drugs. Moreover, the Company believes that the broad-spectrum
action of Ampligen greatly increases the probability of success. HEM has
chosen markets which are not only sizeable and growing, but in disease areas
for which there are presently no known cures.
4
The Company's business strategy is designed around seeking the required
regulatory approvals which will allow the progressive introduction of
Ampligen for HIV and ME/CFS followed by HBV in the U.S., Canada, Europe and
Japan. There can be no assurance of regulatory approvals for any of such
disorders. Ampligen, however, has received Orphan Drug designation (see
"Business - Government Regulations") from the FDA for four indications (AIDS,
chronic fatigue syndrome, renal cell carcinoma and malignant melanoma). The
Company is also developing a second generation RNA drug technology, termed
Oragen compounds, which the Company believes offers the potential for broad
spectrum antiviral activity by oral administration. In addition the Company
has commenced development of certain clinical laboratory diagnostic products
known as Diagen products. In December, 1996, the Company announced receipt of
Diagen Patents in ten (10) European countries.
Ampligen
Ampligen is a high molecular weight RNA drug which is administered
intravenously. Based on the results of clinical trials to date, the Company
believes that Ampligen may have the potential to address significant medical
needs where current treatment methods are inadequate or non-existent.
The preliminary results of the Company's animal and human tests indicate
that Ampligen may have both broad-spectrum anti-viral and anti-cancer
activities. To date, Ampligen has been given to over 300 patients in the
clinical trials authorized by the U.S. Food and Drug Administration at over
20 clinical trial sites in the United States under effective Investigational
New Drug (IND) applications. In addition, a clinical trials are currently
ongoing in Belgium and Houston, Texas. Ampligen clinical trials have been
approved in Ireland and Canada. The following table summarizes the primary
indications and the current clinical trial regulatory status of Ampligen in
the U.S.
FDA- AUTHORIZED
INDICATION THERAPEUTIC TARGETS CLINICAL TRIALS*
- ---------- ------------------- ----------------
Antiviral Chronic HBV (hepatitis B virus) Phase I/II(1)
HIV Phase II(2)
ME/CFS (chronic fatigue syndrome) Phase II/III(3)
Anti-Cancer Renal Cell Carcinoma Phase II/III(4)
Melanoma (skin cancer) Phase II(5)
* The foregoing chart is qualified in its entirety by reference to more
detailed information included elsewhere in this document. See
"Business--Government Regulation" for a description of the FDA
regulatory approval process.
(1) A Phase I/II study was authorized by the FDA. This study has been
partially enrolled with patients, and is currently on hold pending
ongoing discussions with a potential corporate partner.
(2) A FDA-authorized Phase I and two Phase II clinical trials of Ampligen
for HIV infection have been completed; one Phase II trial studied
Ampligen as monotherapy and the second used Ampligen in combination
with AZT. A Phase II study utilizing Ampligen in a population of
largely asymptomatic HIV carriers was recently initiated in Houston,
Texas.
(3) The Company has completed a Phase I/II study and a second Phase II
clinical trial of Ampligen in ME/CFS under FDA authorizations.
Recently the Company presented an open label expanded access Phase II
study to the FDA for review and approval as well as a new Phase II/III
study in ME/CFS. In addition, a Phase II study is ongoing in Belgium.
(4) A FDA -authorized Phase I/II study of Ampligen in cancer, including
patients with renal cell carcinoma, has been completed. The Company
has received authorization from the FDA to initiate a Phase II/III
study of Ampligen in patients with metastatic renal cell carcinoma.
At present, the Company does not anticipate devoting significant
Company resources to the funding of this study, and, accordingly, a
date for initiating this study has not been determined.
5
(5) Patients with metastatic melanoma have been treated with Ampligen as
monotherapy under a FDA-authorized Phase I/II open-label study of
Ampligen in cancer. The FDA has authorized the Company to conduct a
Phase II trial of Ampligen in melanoma. The Company is seeking a
corporate partner to assist in conducting this trial.
Oragen Drugs
Oragen drugs are low molecular weight RNA compounds which the Company
believes, by virtue of their small size and molecular stability, have the
potential for becoming the first oral, broad-spectrum nucleic acid treatments
for various viral diseases such as HIV infection and chronic HBV infection.
The technology for these nucleicacid products is licensed to the Company for
commercial use on an exclusive basis from Temple University, subject to
certain limited exceptions. To date, a number of compounds have been
developed (see Item 3, page 21 - Legal Proceedings).
Initial studies indicated that these drugs may withstand enzymatic
destruction, an important factor in order for compounds to enter the blood
stream in an intact form. Results from in vitro studies conducted in
collaboration with the National Institute of Allergy and Infectious Diseases
indicate that Oragen products may inhibit HBV infection, and in vitro studies
conducted in collaboration with the National Cancer Institute and the
University of Mainz, Germany, indicate that Oragen products may inhibit HIV
infections. One compound, Oragen 0004, has shown inhibition of HBV
multiplication in vitro and another, Oragen 0044, has demonstrated activity
against HIV in vitro studies performed by Temple University. These two Oragen
compounds have been produced in quantities which the Company believes are
sufficient to perform animal toxicology testing. Experiments with mice at the
University of Toronto indicate that Oragen drugs may protect against mouse
hepatitis virus. There has been no human clinical testing of Oragen products
to date. There can be no assurance that human clinical testing, if initiated,
will yield results consistent with those achieved in vitro or animal testing.
The Company believes that Oragen drugs may exert anti-viral activity
through two intracellular mechanisms. First, they may activate the
intracellular "latent" RNase-L to degrade viral RNA. Second, they inhibit the
HIV replication enzyme, reverse transcriptase, by binding to a different site
on the enzyme from that bound by conventional anti-HIV compounds such as AZT.
The Company's belief in the potential effects of these compounds is based, in
part, on the collaborative in vitro experiments performed with the National
Cancer Institute referred to above. Certain in vitro experiments performed at
Vanderbilt University indicate that certain human immune cells can be
protected from cell death caused by HIV infection by treatment with Oragen
drugs. Under sponsorship of the National Institutes for Allergy and
Infectious Diseases, in vitro studies at Georgetown University also
demonstrated that Oragen drugs may inhibit the replication of human HBV. In
each of the in vitro studies, no substantial cell toxicity was observed at
concentrations which inhibit the applicable virus.
The Company believes Oragen drugs work at a different stage of the
anti-viral and anti-cancer response chain than Ampligen and therefore may be
effective in disorders where the activity of Ampligen is limited. The Company
also believes that Oragen drugs can potentially be engineered to trigger
specific responses in immune cells based on in vitro tests. Significant
additional testing will be required in order to determine whether the
Company's beliefs regarding Oragen drugs can be transformed into viable human
therapeutic products.
The following table shows the Company's past and present pre-clinical
studies of Oragen compounds. Except as otherwise noted, the studies have been
conducted under collaborative arrangements pursuant to which the Company
supplies quantities of the drug to the third party institution for testing,
and that institution assigns all of the commercial rights to the studies to
the Company and funds the research costs.
6
Target Programs Potential Market Applications Collaborators
Human Immunodeficiency Treatment of HIV National Cancer
Institute
Temple University(1)(2)
Vanderbil University(1)
University of Mainz,
Germany(1)
Hepatitis B Virus (HBV) Treatment of HBV National Institute of
Allergy and Infectious
Diseases
Georgetown University
Mouse Hepatitis Virus Treatment of Hepatitis C University of
Toronto(1)
Herpes Simplex Virus Treatment of Herpes Infectious Medical College of
Pennsylvania(1)
Type 1 and 2 Juntendo University
Tokyo, Japan
Poliovirus/Respiratory Childhood Viral Diseases Howard University
Syncytial virus
Solid tumors Treatment of various types Temple University(1)(2)
of cancer Hahnemann University
(1) Funding provided by the Company. In all other cases, funding provided
by the institution.
(2) The Company was notified in July 1994 that Temple believed the Company
was in breach of its licensing agreement and therefore the agreement
was being terminated. The Company and Temple University settled this
dispute in December 1996 and the licensing agreement was re-instated.
Diagnostic Diagen Products
The Company is also developing a set of clinical laboratory diagnostic
products, trademarked Diagen products, that are designed to assist physicians
in identifying patients for the Company's RNA drug therapies and to assist in
their clinical management thereafter. The Company believes that the
availability of such tests may lead to improved patient care and increased
market penetration by the Company's products, if and when such products are
available for commercial sale. While these tests are at an early stage of
commercial development, the Company believes that they may ultimately provide
an opportunity for diversification of the Company's products and revenues and
may help to identify patients who could benefit from the Company's drug
treatment. The Diagen products would have to go through a regulatory process
for diagnostic product clearance prior to commercial sale.
Patents and Proprietary Rights
The Company has filed more than 380 patent applications involving
chemistry, processes, biological insights and specific target-oriented
compositions of matter worldwide covering its RNA technology, including 30
filings with the U.S. Patent Trademark Office and more than 350 corresponding
foreign patent applications in other countries, such as members of the
European Patent Convention, Japan, South Korea, Australia. There can be no
assurance that the Company's patent applications will result in the issuance
of patents. The Company's policy is to file patent applications on a
worldwide basis to protect technology, inventions, and improvements that are
considered important to the development of its business. The Company has, as
a matter of policy, sought patent protection in each of the three major
geographic markets: the United States, Europe, and the Pacific Rim. The
Company also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its
competitive position. Of the patent applications filed worldwide, over 230
have been issued (including 13 in the United States).
Within the 13 patents issued or accepted for issuance in the United
States, seven include claims which afford patent protection for RNA treatment
in HIV disease; one affords patent protection for RNA treatment of Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome, two affords patent protection for
RNA treatment/diagnosis of hepatitis infection, and three affords patent
protection in other areas.
7
The Company believes its treatment use, as well as the composition of
matter patents for Ampligen, if granted and upheld, will be a critical
element to the Company's success.
In addition, the Company has filed patent applications for diagnostic
applications resulting from insights and discoveries made by its employees
and consultants relating to RNA nucleic acid structure and 2-5A biochemistry,
which the Company believes may be applicable to the development and
commercialization of various drugs that may operate by augmentation of
cellular antiviral defenses.
The license agreement with Temple University covering the Oragen
Compounds presently includes 8 issued U.S. patents and 29 issued foreign
patents as well as 24 patent applications in process.
The patent positions of biopharmaceutical and biotechnology firms,
including the Company, are generally uncertain and involve complex legal and
factual questions. Consequently, even though the Company is currently
prosecuting many patent applications with the U.S. and foreign patent
offices, the Company does not know how many of its applications will result
in the issuance of any patents or, of patents which are issued, whether they
will provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature tend to lag behind actual discoveries by
several months, The Company cannot be certain that it was the first creator
of all inventions covered by pending patent applications or that it was the
first to file patent applications for all such inventions. Competitors or
potential competitors may have filed applications for, and may obtain,
additional patents and proprietary rights relating to, compounds or processes
competitive with those of the Company. Accordingly, there can be no assurance
that the Company's patent applications will result in patents being issued or
that if issued the patents will afford protection against competitors with
similar technology; nor can there be any assurance that others will not
obtain patents that the Company would need to license or circumvent. The
Company is aware of a claim by Vanderbilt University regarding the use of RNA
combined with azidothymidine (AZT) in the treatment of a certain human
disease (HIV infection). The Company does not believe this claim to have
merit. The Company has used RNA with AZT in some of its clinical programs.
There can be no assurance that the Company's patents or those of its
competitors, if issued, would be upheld by a court of competent jurisdiction.
The Company also relies upon unpatented trade secrets, and no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to unpatented trade secrets.
The Company requires it employees, consultants, members of the Scientific
Advisory Board, outside scientific collaborators and sponsored researchers
and other advisors to execute confidentiality agreements upon the
commencement of employment or consulting relationships with the Company.
These agreements provide that all confidential information developed or made
known to the individual during the course of the individual's relationship
with the Company be kept confidential and not disclosed to third parties
except in specific circumstances. In the case of employees, the agreements
provide that all inventions conceived by the individual shall be the
exclusive property of the Company. There can be no assurance, however, that
these agreements will provide meaningful protection or adequate remedies for
the Company's trade secrets in the event of unauthorized use or disclosure of
such information.
Manufacturing
Drug intermediates used in the production of Ampligen are currently
manufactured from raw materials by Pharmacia Biotech, a division of
Pharmacia-Upjohn, a major multinational pharmaceutical company. The
intermediates are analyzed by the Company for compliance with specifications
and then transferred to another contractor where the Ampligen drug
intermediates are mixed under defined conditions to prepare a freeze-dried
form of Ampligen. HEM provides a representative to supervise and monitor
procedures and is the owner of all proprietary information used to generate
its Ampligen intermediates. The Company also plans to phase in the
manufacture of raw materials for
8
Ampligen by its corporate partner Bioclones Proprietary Limited ("Bioclones")
a biopharmaceutical company associated with The South African Breweries Ltd.
("SAB" and together with Bioclones, "SAB/Bioclones"), from a facility in
South Africa. Critical contract relationships are covered by long term
non-compete provisions as well as customary non-public disclosure terms. In
each case the final product is tested by the Company to determine drug
product compliance with a set of technical specifications. Upon meeting these
specifications, the product is transferred to HEM and dosage units are then
prepared at HEM's Rockville, Maryland, manufacturing facility. Pharmacia has
a minor equity interest in the Company. The Company's plan is to source raw
materials for its lead products on a worldwide basis. At present, Oragen
compounds used for the Company's pre-clinical testing are produced at the
University of Konstanz, Germany. The Company has alternate sources for these
raw materials in addition to the named suppliers.
Marketing
The Company intends to design its marketing strategy to reflect the
differing health care systems around the world, and the different marketing
and distribution systems that are used to supply pharmaceutical products to
those systems. In the United States, the Company expects that, subject to
receipt of regulatory approval, Ampligen will be used in three medical
arenas: physicians' offices or clinics, the hospital and the home setting.
The Company currently plans to use a service provider in the home infusion
(non-hospital) segment of the U.S. market to execute direct marketing
activities, conduct physical distribution of product and handle billings and
collections. Accordingly, the Company is developing marketing plans to
facilitate the product distribution and medical support for indications, if
and when they are approved, in each arena. The Company believes that this
approach will facilitate the generation of revenues without incurring the
substantial costs associated with a sales force. Furthermore, management
believes that the approach will enable the Company to retain many options for
future marketing strategies.
In February, 1996, the Company entered into an agreement with Rivex
Pharma Inc., a Canadian-based pharmaceutical company "Rivex"), pursuant to
which Rivex will provide various services in connection with the marketing
and exclusive distribution of Ampligen in Canada on an emergency drug release
basis. Under the terms of this agreement, the Company will supply and Rivex
will purchase as much Ampligen as necessary to satisfy Rivex's customers at a
mutually agreed upon cost. In return, Rivex will retain the exclusive right
to market and distribute Ampligen in Canada. The Company expects Rivex to
have patients in this program beginning in the second quarter of 1997.
In Europe, the Company plans to adopt a country-by-country and, in
certain cases, an indication-by-indication marketing strategy due to the
heterogeneity of governmental regulations and alternative distribution
systems in these areas. The Company also plans to adopt an
indication-by-indication strategy in Japan. Subject to receipt of regulatory
approval, the Company plans to seek strategic partnering arrangements with
pharmaceutical companies to facilitate product introductions in these areas.
No assurances can be given that any such arrangement will be entered into on
terms acceptable to the Company. The relative prevalence of people suffering
from target indications for Ampligen varies significantly by geographic
region, and the Company intends to adjust its clinical and marketing planning
to reflect the special needs of each area. The Company does not currently
anticipate devoting significant resources to the establishment of an in-house
sales force in the near term. In countries in South America, the United
Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand, and certain other
countries and territories, the Company contemplates marketing its products
through its relationship with SAB/Bioclones pursuant to the SAB Agreement.
The Company is also developing a set of clinical laboratory diagnostic
products, trademarked Diagen products, that are designed to assist physicians
in identifying patients for the Company's RNA drug therapies and to assist in
their clinical management thereafter. The Company believes that the
availability of such tests may lead to improved patient care and increased
market penetration by the Company's therapeutic products, if and when such
products are available for commercial sale, although the Company does not
anticipate deriving significant revenues directly from the commercial sale of
Diagen products. These tests are at an early stage of development and the
Company has received limited royalties in 1994 from its licensed reference
laboratory in Texas. The Diagen products would have to go through a
regulatory process for diagnostic product clearance applicable to medical
devices prior to commercial sale. In some cases, use in clinical trials may
require FDA clearances. See "Business" Government
9
Regulation" below. The Company's objective is to license these potential
products to a diagnostic company. The Company has granted rights to certain
of the patents related to the Diagen products to one of its subsidiaries. See
"Business--Subsidiary Companies."
Research and Development/Collaborative Agreements
The development of the Company's products has required and will continue
to require the commitment of substantial resources to conduct the
time-consuming research, preclinical development, and clinical trials that
are necessary to bring pharmaceutical products to market and to establish
commercial-sale production and marketing capabilities. During the Company's
last three fiscal years, the Company has spent approximately $4.5 million for
research and development, of which $1.9 million was expended in the year
ended December 31, 1996.
Based on its current operating plan, the Company anticipates that the net
cash and cash equivalents on hand of $5.3 million, together with the
anticipated receipt of limited revenues from the sales of Ampligen, will be
sufficient to meet the Company's capital requirements through 1997. It is not
expected that this will be sufficient to enable the Company to complete the
necessary clinical trials or regulatory approval process for Ampligen for any
indication or, if any such approval were obtained, to begin manufacturing or
marketing Ampligen on a commercial basis. Accordingly, the Company will need
to raise substantial additional funds through additional equity or debt
financing, collaborative arrangements with corporate partners, off balance
sheet financing or from other sources in order to complete the necessary
clinical trials and the regulatory approval processes and begin
commercializing its products. If adequate funds are not available from
operations, as is anticipated, and if the Company is not able to secure
additional sources of financing on acceptable terms, the Company's business
will be materially adversely affected.
As part of its research and development activities, the Company has
entered into various collaborative and sponsored research agreements with
researchers, universities and government agencies. The Company believes that
these agreements provide the Company with access to physicians and scientists
with expertise in the fields of clinical medicine, virology, molecular
biology, biochemistry, immunology and cellular biology.
The Company has entered into the following collaborative agreements
regarding its products:
In October, 1994, the Company entered into an agreement with
Bioclones/SAB (the "SAB Agreement") with respect to co-development of various
RNA drugs, including Ampligen, for which the Company has previously obtained
international patent protection. The SAB Agreement provides that the Company
will provide SAB/Bioclones with an exclusive manufacturing and marketing
license for certain Southern hemisphere countries (including all countries in
South America) as well as the United Kingdom, Ireland, Africa, Australia,
Tasmania, New Zealand, and certain other countries and territories. In
exchange for these marketing and distribution rights, the SAB Agreement
provides for: (a) a $3 million cash payment to the Company; (b) the formation
and issuance to the Company of 24.9 % of the capital stock of a company to
develop and operate a new manufacturing facility for RNA drugs to be
constructed by SAB/Bioclones, and (c) royalties on all sales of the Company's
products in the licensed territories. In addition, SAB/Bioclones agreed to
use its best efforts to pursue the marketing approval of Ampligen for HBV in
Australia, South Africa, Brazil, and the United Kingdom, as well as to
perform (at its own expense) a phase III study of Ampligen in chronic HBV
infection in South Africa, which clinical study is to be performed pursuant
to U.S. FDA good clinical practice and good laboratory practice guidelines
and standards. SAB/Bioclones will be granted a right of first refusal to
manufacture and supply to the Company the drug product required for not less
than one-third of its world-wide sales of Ampligen (after deducting
SAB/Bioclones-related sales) and will also be granted a right of first
refusal for the manufacture and marketing of any of the Company's other RNA
drugs in the licensed territories. According to its most recent annual
report, SAB is a multinational holding company investing in and taking
management responsibility for a portfolio of business in beer and beverages
retailing, hotels and the manufacture of certain mass market consumer goods,
together with strategic investments in businesses which support its
mainstream interests. By September 30, 1995, the Company had received
$3,000,000 in proceeds from SAB, in accordance with the terms of the SAB
Agreement. SAB notified the Company that it had initiated manufacturing of
test amounts of the licensed product as
10
a significant step towards the new manufacturing facility and design thereof.
SAB is traded on the NYSE as American Depository Receipts (ADRs).
In February, 1996, the Company entered into an agreement with Rivex
Pharma, Inc., a Canadian-based pharmaceutical company which grants Rivex an
exclusive marketing and distribution rights for Ampligen in Canada. In
exchange, Rivex is committed to purchase Ampligen from the Company. Rivex is
also committed to perform regulatory compliance functions necessary for
marketing approvals in Canada.
The Company has a clinical pharmacology unit at Hahnemann University
Hospital (now part of the Allegheny Health Education and Research Foundation
and known as Allegheny University Hospitals - Hahnemann Division) in
Philadelphia. This clinical pharmacology unit has performed studies on
Ampligen metabolism in the body, and initiates clinical trials at the Phase
I/II level. The Company also plans to use this unit for its initial clinical
studies of Oragen drugs, subject to receipt of necessary clinical approvals.
The Company does not own its own research and development or drug
discovery laboratories. Instead, employees of the Company's collaborators
conduct those functions at the laboratories of their employers. The Company
has a long-standing relationship with the Hahneman Division of Allegheny
University Hospitals (Allegheny/Hahnemann), which currently provides
laboratory support in conjunction with licensing arrangements and financial
support from the Company. No assurances can be given that such relationship
will continue on terms advantageous to the Company or at all.
In June 1989, the Company entered into an assignment and research support
agreement with Allegheny/Hahnemann and Dr. David Strayer, Dr. Isadore
Brodsky and Dr. David Gillespie who is now deceased (the "Scientist Group").
Dr. Strayer is the Company's Medical Director. Prior to the execution of the
Allegheny/Hahnemann Agreement, Allegheny/Hahnemann and the Scientist Group
had participated in the clinical testing of Ampligen. In an effort to obtain
the benefits of the Scientist Group's future contributions to the development
of Ampligen and obtain exclusive rights to certain proprietary and regulatory
rights relating to Ampligen, the Company, Allegheny/Hahnemann and the
Scientist Group entered into the Allegheny/Hahnemann Agreement, which
provides (i) for the assignment by Allegheny/Hahnemann and the Scientist
Group to the Company of all of their respective rights in certain proprietary
information which was then owned or subsequently developed and the exclusive
and perpetual right to apply for any patents, trademarks or copyrights
relating to the proprietary information; (ii) for the payment by the Company
to Allegheny/Hahnemann (and the sharing by Allegheny/Hahnemann and the
Scientist Group on such terms as they determine) of a royalty of 2% of net
sales proceeds (up to a maximum royalty of $6 million per year) on all
Ampligen sold by the Company or any entity licensed by the Company after the
date of the grant by the FDA of the first NDA for Ampligen through January 1,
2005; (iii) for the payment by the Company to Allegheny/Hahnemann of $
162,000 for certain scientific consultative support services to be performed
by the Scientist Group during the first year of the Allegheny/Hahnemann
Agreement; (iv) for the payment by the Company to Allegheny/Hahnemann of
certain incremental amounts for scientific consultative support services to
be rendered by the Scientist Group subsequent to the first year of the
Allegheny/Hahnemann Agreement; (v) that either party may terminate the
scientific consultative support services of the Scientist Group (and the
Company's obligations to pay for those services) on 90 days' notice; and (vi)
that all rights to discovery and inventions resulting from the
Allegheny/Hahnemann Agreement are to be the exclusive property of the
Company. The Company has not made any incremental payments to
Allegheny/Hahnemann on account of scientific consultative support services
rendered by any member of the Scientist Group pursuant to the
Allegheny/Hahnemann Agreement for any period subsequent to September 30,1992.
The Company has entered into an at-will arrangement with
Allegheny/Hahnemann University, and Dr. Strayer, among others, pursuant to
which the services of Dr. Strayer, among others, are made available to the
Company in return for monthly salary subsidization payments made by the
Company to the University. The aggregate amount of these monthly payments is
presently $14,896.
In August 1988, the Company entered into a pharmaceutical use license
agreement with Temple University (the "Temple Agreement"). Under the terms of
the Temple Agreement, Temple granted the Company an exclusive
11
world-wide license for the term of the agreement for the commercial sale of
Oragen products using patents and related technology held by Temple, which
license is exclusive except to the extent Temple is required to grant a
license to any governmental agency or non-profit organization as a condition
of funding for research and development of the patents and technology
licensed to the Company. The rights to such patents and related technology
had previously been assigned to Temple by various parties, including Dr.
Robert J. Suhadolnik, an employee of Temple. The Temple Agreement provides
(i) for the payment by the Company to Temple of 4% of net sales of Oragen
products the active ingredients of which consist entirely of products,
processes or uses claimed by Temple's patents and 2% of net sales of Oragen
products some, but not all, of the active ingredients of which consist of
products, processes or uses claimed by Temple's patents, with minimum
royalties of $30,000 per year commencing in 1995; (ii) that the Company must
seek all necessary approvals for the commercial sale of Oragen products;
(iii) that the Company must file an application for marketing approval for at
least one licensed product with the FDA or a foreign counterpart on or before
August 3, 1996; (iv) for the funding of specified research payments by the
Company; and (v) that the Company shall have an exclusive option to negotiate
for a period of six months the terms of an exclusive license for the
commercial sale of any future related technology with respect to which Temple
shall hold a patent. The Temple Agreement expires upon the expiration of the
last licensed patent, unless sooner. terminated by mutual consent, upon the
failure by the Company to pay any required royalties or upon any material
breach of the agreement. Dr. Suhadolnik, as well as his laboratory, will
derive income and financial support from any royalties paid by the Company.
The Company was notified by Temple in July 1994 that it believed the Company
was in breach of the Temple Agreement and that Temple believed that the
Temple Agreement was terminated. The Company filed a lawsuit seeking a
declaratory judgement that the Temple Agreement remains in full force and
effect and seeking monetary damages. Temple has filed a motion to dismiss
this lawsuit and in January 1995, Temple filed a separate litigation against
the Company seeking declaratory judgment that the Temple Agreement has been
lawfully terminated, together with an award of costs, including attorney
fees. The Company and the University entered a settlement agreement in
December, 1996 which resolves all issues and reinstates the licensing rights.
See Item 3 "Legal Proceedings".
In May 1992, the Company entered into a letter agreement to provide
research payments to Dr. Werner E. Muller at the University of Mainz for
various exclusive 20-year licensing arrangements including certain
technologies for genetic manipulation of the 2-5A pathway. The Company
believes that the research billing conducted by Dr. Muller will provide
general knowledge with respect to the manipulation of the cellular mechanism
by which Ampligen works.
In addition to the arrangements with Temple University and Hahnemann
University described above, the Company has two types of collaborative
research arrangements. First, the Company has entered into "sponsored
research arrangements" with various institutions which provide for the
payment by the Company of specified financial support to the institutions
which conduct the research . Second, the Company has entered into
"collaborative arrangements" pursuant to which the institution conducts
studies of the Company's products at the institution's expense and gives the
Company exclusive commercial rights to research results. The Company provides
its drugs to these institutions free of charge. Collaborative research
arrangements provide that the proprietary knowledge is the sole property of
the Company but permit the collaborator, after a specified time period, to
publish the results of its research in scientific medical journals. The
Company has research agreements with the National Institute for Allergy and
Infectious Diseases on the use of Ampligen and Oragen products in the
treatment of HBV infection and various herpes and respiratory viruses and
Hahnemann University on the biochemical and molecular activities of RNA.
Other collaborators include the following entities or scientists therefrom:
the National Cancer Institute, Harvard University Medical School, Yale
University Medical School, Vanderbilt University, University of Pittsburgh,
Howard University, Cornell University, Georgetown University, Stanford
University, University of Pennsylvania, Medical College of Pennsylvania,
University of California at Davis and the Uniformed Services University for
the Health Sciences. International collaborations include scientists from
Konstanz University (Germany), University of Mainz (Germany), University of
Toronto (Canada) and Juntendo University (Japan).
The Company intends to continue to engage in such collaborative and
sponsored research with selected institutions. There can be no assurance,
however, that the Company will be able to maintain its existing collaborative
arrangements or enter into new collaborative arrangements.
12
Competition
Competition in the development and marketing of therapeutic drugs for
human diseases is intensely competitive. Many different approaches are being
developed for management of the diseases targeted by the Company. In addition
to drug therapy, companies are promoting biological and hormonal therapies,
prophylactic and therapeutic vaccines and surgery. These approaches, however,
may have limited utility and some are often associated with toxicity,
including life-threatening side-effects.
Most FDA-approved anti-viral drugs appear to directly inhibit the viruses
by interfering with their replication (so-called reverse transcriptase or
protease inhibitors). Their mechanisms of action do not seem to stimulate the
production of immune cells to attack or scavenge the disease-causing agents.
Interferon therapy does act by an immune mechanism and has been approved by
the FDA for the treatment of chronic HBV; durable effects, however, are seen
in only a minority of treated subjects and the side-effects are substantial.
Interferon has thus far not been demonstrated to be efficacious in HIV,
ME/CFS and the primary tumors (other than melanoma) and indications targeted
by the Company. The newer anti-HIV drugs may reduce the level of HIV in the
plasma by approximately 99%; however, the dramatic effects are often
transitory.
Below is a list of certain compounds which appear directly competitive
with the Company's products:
HIV Infection. The principal treatments for HIV are AZT, DDI, DDC, D4T
and 3TC. A group of newer compounds, termed protease inhibitors, share the
problems of rapid viral mutation, multi-drug resistance, etc., but may cause
a more dramatic transient drop in amount of HIV present in the blood stream.
No immune based drugs have been approved to date, and there is a paucity of
clinical developmental research on vaccines due to the problem of rapid viral
mutations.
HBV. Treatments include interferon-alpha, thymosin and 3TC. Only
interferon alpha has proven effective in rigorous clinical tests, and less
than 20% of patients have a durable response. Also, interferon's side effects
are substantial and may curtail patient use and physician acceptability,
particularly in the major Asian markets.
ME/CFS. The FDA has not approved any drugs specifically for this
disorder. Physicians typically prescribe analgesics psychotropic and
anti-inflammatory drugs to combat and palliate the symptoms without
addressing the underlying immunologic damage or the herpes virus
proliferation.
Renal Cell Carcinoma. Interleukin 2 may be an extremely toxic product
often requiring immediate access to a critical care unit if used according to
manufacturer's recommendations (Chiron/Cetus).
Malignant Melanoma. Interferon alpha was recently approved by the FDA;
however, the percentage of responses is small, and a significant percentage
of relapses are expected. Treatment costs with interferon often exceed
$10,000 per year.
There are several publicly held companies that place emphasis on nucleic
acid technology. Each is outlined below from publicly available documents
filed with the SEC.
Gilead Sciences, Inc. (Foster City, California; GILD/Nasdaq). Gilead is
developing nucleotide technologies and is pursuing pre-clinical and clinical
development of a number of product candidates.
ISIS Pharmaceuticals, Inc. (Carlsbad, California; ISIP/Nasdaq). This
company, founded in 1989, has devoted substantially all of its resources to
research, drug discovery and development programs. In July, 1995, ISIS 2922
was in Phase III clinical trials to treat CMV-induces retinitis in AIDS
patients, ISIS 2105 was in Phase II trials to treat genital warts, and Phase
II trials were planned for ISIS 2302 for treatment of a variety of
inflammatory diseases.
13
The Company anticipates that it will face increased competition in the
future as new products enter the market and advanced technologies become
available. There can be no assurance that existing products or new products
developed by the Company's competitors will not be more effective than any
that may be developed by the Company. Competitive products may render the
Company's technology and products obsolete or noncompetitive prior to the
Company's recovering research, development or commercialization expenses
incurred with respect to any such products.
Most of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the
Company. In addition, many of these competitors have significantly greater
experience than the Company in undertaking research, preclinical studies and
human clinical trials of new pharmaceutical products, obtaining FDA and other
regulatory approvals, and manufacturing and marketing such products.
Accordingly, the Company's competitors may succeed in commercializing the
products more rapidly or more effectively than the Company.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes, and secure sufficient capital
resources for the often substantial period between technological conception
and commercial sales.
Subsidiary Companies
In September 1994, the Company incorporated three wholly-owned
subsidiaries--BioPro Corp. ("BioPro"), Core BioTech Corp. ("Core BioTech"),
and BioAegean Corp. ("BioAegean")--in the State of Delaware.
The purpose of BioPro is to commercialize tobacco-related products.
BioPro intends to develop methods to utilize RNA technology in conjunction
with certain tobacco and cigarette filter products to provide cleaner tobacco
products. The technology is based in part on recent unpublished experiments
in laboratory animals conducted at the University of California, Davis, which
suggest that the Company's RNA drugs may prevent certain aspects of lung
fibrosis under certain experimental conditions. In September, 1994, the
Company granted an exclusive worldwide license and/or sub-license to certain
of its patents and assigned certain other patents to BioPro (the "BioPro
License ") for a term of three years, which term will automatically be
extended for a term of 15 years in the event that BioPro provides evidence
that it has commercialized one or more of the patents. BioPro has agreed that
it will not develop any product or technology which may be deemed therapeutic
and has granted a right of first refusal to the Company with respect to any
technology which it may develop or acquire. BioPro has the right to grant
sublicenses subject to the requirement that its sublicensees agree to
non-competition arrangements with the Company. The Company has agreed that it
will not develop any technology related to the business of BioPro and has
granted BioPro a right of first refusal with respect to any technology it may
develop with respect to the business of BioPro. The Company is developing a
business plan and will continue to seek corporate partners in 1997.
The purpose of Core BioTech is to commercialize the Company's diagnostic
oriented patents which provide RNA technology to detect certain difficult to
diagnose viral diseases such as ME/CFS and other immuno-dysfunctional
conditions through strategically located central reference laboratories. In
September, 1994, the Company granted an exclusive worldwide license and/or
sub-license to certain of its patents and assigned certain other patents to
Core BioTech (the "Core BioTech License") for a term of three years, which
term will automatically be extended for a term of 15 years in the event that
Core BioTech provides evidence that it has commercialized one or more of the
patents. Core BioTech has agreed that it will not develop any product or
technology which may be deemed therapeutic and has granted a right of first
refusal to the Company with respect to any technology which it may develop or
acquire. Core BioTech has the right to grant sublicenses subject to the
requirement that its sublicensees agree to non-competition arrangements with
the Company. The Company has agreed that it will not develop any technology
related to the business of Core BioTech and has granted Core BioTech a right
of first refusal with respect to any technology it may develop with respect
to the business of Core BioTech.
14
In June 1995, the directors of BioAegean approved the private placement
of 1,000,000 shares of common stock at $1.00 per share which is expected to
occur in Fiscal 1997. In addition, the directors of BioAegean issued 10-year
options to purchase an aggregate of 1,200,000 shares of common stock of
BioAegean at an exercise price of $1.00 per share (the "BioAegean Options")
to its officers and directors. The BioAegean Options are conditional upon
the recipient's agreement to serve BioAegean as needed for at least 24 months
unless fully incapacitated. William A. Carter, M.D., Chairman, President and
Chief Executive Officer of the Company, serves as Chairman, Chief Executive
Officer and a Director of BioAegean and received 300,000 BioAegean Options.
R. Douglas Hulse, Chief Operating Officer of the Company, serves as Chief
Operating Officer of BioAegean and received 50,000 BioAegean Options. Peter
Rodino, III, a director and Secretary of the Company, serves as
Vice-Chairman, Secretary, Corporate Counsel and a director of BioAegean and
received 150,000 BioAegean Options. Robert Peterson serves as Chief Financial
Officer of both the Company and BioAegean and received 50,000 BioAegean
Options. Sharon Will, Vice President of Investor Relations and Corporate
Communications for the Company, serves as Vice President of Marketing for
BioAegean and received 150,000 BioAegean Options. Harris Freedman serves as
Vice President for Strategic Alliances for both the Company and BioAegean and
received 150,000 BioAegean Options. Richard Piani, a director of the Company,
serves as a director and the Advisor for European Affairs of BioAegean and
received 50,000 BioAegean Options. Gerald Kay serves as a director for both
the Company and BioAegean and received 50,000 BioAegean Options. BioAegean's
remaining director, Jerome Belson, a principal shareholder of the Company,
received 50,000 BioAegean Options. The Company is presently exploring
strategic alliances with recognized skin care companies which currently
market certain products to diminish the effects of photoaging and UV-light on
the skin.
Government Regulation
Overview. Regulation by governmental authorities in the U.S. and foreign
countries is and will be a significant factor in the manufacture and
marketing of the Company's proposed products and in its ongoing research and
product development activities. All of the Company's proposed products and
products of its ongoing research and product development activities will
require regulatory clearances prior to commercialization. In particular,
human new drug products are subject to rigorous preclinical and clinical
testing as a condition of clearances by the FDA and by similar authorities in
foreign countries. The lengthy process of seeking these approvals, and the
ongoing process of compliance with applicable statutes and regulations, has
required and will continue to require the expenditure of substantial
resources. Any failure by the Company or its collaborators or licensees to
obtain, or any delay in obtaining, regulatory approvals could materially
adversely affect the marketing of any products developed by the Company and
its ability to receive product or royalty revenue.
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to such matters as safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use of and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents,
used in connection with the Company's research work. The Company believes
that its Rockville, Maryland manufacturing and quality assurance/control
facility is in substantial compliance with all material regulations
applicable to these activities.
U.S. Regulatory Process. Before a new drug product may be sold
commercially in the U.S. and other countries, clinical trials of the product
must be conducted and results submitted to the appropriate regulatory
agencies as part of the approval process. The Company's therapeutic and
diagnostic products are subject to regulation in the U.S. under the Food,
Drug and Cosmetic Act (the "FDC Act"). Ampligen and other RNA drugs will be
reviewed as new drugs by the FDA's Center for Drug Evaluation and Research
("CDER"). The process includes:
15
(1) Drug Products. The steps required before a non-biological drug product
may be marketed in the U.S. include (a) conducting appropriate pre-clinical
laboratory and animal tests, (b) submitting to the FDA an application for an
Investigational New Drug ("IND"), which must become effective before human
clinical trials may commence, (c) conducting well-controlled human clinical
trials which establish the safety and efficacy of the drug product, (d)
filing a New Drug Application ("NDA") with the FDA, and (e) obtaining FDA
approval of the NDA prior to any commercial sale or shipment of the drug. In
addition to obtaining FDA approval for each indication to be treated with
each product, each domestic drug manufacturing establishment must register
with the FDA, list its drug products with the FDA, comply with current Good
Manufacturing Practices ("GMP") requirements and be subject to inspections by
the FDA. Foreign manufacturing establishments also must comply with GMP
requirements, and are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA.
Pre-clinical tests include formulation development, laboratory evaluation
ofproduct chemistry and animal studies toassess the potential safety and
efficacyof the product formulation. Drug products must be manufactured in
accordance with GMP requirements and pre-clinical tests must be conducted in
accordance with the FDA regulations regarding Good Laboratory Practices. The
results of the pre-clinical tests are submitted to the FDA as part of the IND
and are reviewed by the FDA prior to authorizing the sponsor to conduct
clinical trials in human subjects. Unless the FDA objects to an IND, the IND
will become effective 30 days following its receipt by the FDA. There is no
certainty that submission of an IND will result in FDA authorization to
commence clinical trials or that authorization of one phase of a clinical
trial will result in authorization of other phases or that clinical trials
will result in FDA approval. Clinical trials may be placed on hold by the FDA
at any time for a variety of reasons, particularly if safety or design
concerns exist.
(2) Clinical Testing Requirements. Clinical trials involve the
administration of the investigational drug product to human subjects. Clinical
trials typically are conducted in three phases and are subject to detailed
protocols. Each protocol indicating how the clinical trial will be conducted
must usually be submitted for review to the FDA as part of the IND. The FDA's
review of a study protocol does not necessarily mean that, if the study is
successful, it will constitute proof of efficacy or safety. Further, each
clinical study must usually be conducted under the auspices of an independent
Institutional Review Board ("IRB") established pursuant to FDA regulations.
The IRB considers, among other factors, ethical concerns, informed consent
requirements, and the possible liability of the hospital conducting the
trials. The FDA or IRB may require changes in a protocol both prior to and
after the commencement of a trial. There is no assurance that the IRB or FDA
will permit a study to go forward or, once started, to be completed.
The three phases of clinical trials are generally conducted sequentially,
but they may overlap. In Phase I, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase I testing for an indication
typically takes at least one year to complete. Phase II involves controlled
tests in a larger but still limited patient population to determine the
efficacy of the drug for specific indications, to determine optimal dosage
and to identify possible side effects and safety risks. Phase II testing for
an indication typically takes at least from one and one-half to two and
one-half years to complete. If preliminary evidence suggesting effectiveness
has been obtained during Phase II evaluations, expanded Phase III trials are
undertaken to gather the additional information about effectiveness and
safety that is needed to evaluate the overall benefit-risk relationship of
the drug and to provide an adequate basis for physician labeling. Phase III
studies for an indication generally take at least from two and one-half to
five years to complete. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any specified time
period, if at all, with respect to any of the Company's products that have
not yet completed any such testing. Nor can there be any assurance that
completion of clinical testing will result in FDA approval. Furthermore, the
FDA may suspend clinical trials at any time if the patients are believed to
be exposed to a significant health risk. Phase III or other clinical studies
may be conducted after rather than before approval under certain
circumstances. For example, the FDA may determine under its accelerated
approval regulations that earlier studies, involving the use of surrogate
markers rather than clinical outcomes, may establish an adequate basis for
drug product approval, providing that the sponsor agrees to conduct an
additional study after approval to verify and describe the clinical benefit
of the drug. These and other similar regulations, however, are often limited
to drug products that are intended to treat serious or life-threatening
diseases,
16
especially those diseases for which there are no alternative therapies, or
that provide meaningful therapeutic benefit to patients over existing
treatments. The Company believes that Ampligen may be eligible for review
under the FDA's "accelerated approval" or other similar regulations for
certain indications; however, the Company has not decided whether to seek
such accelerated or other similar approval and no assurances can be given
that such accelerated or other similar approval, if sought, will be granted
for any indication pursuant to such regulations.
In the case of drugs for life-threatening diseases, the initial human
testing is generally done on patients rather than on healthy volunteers.
Because
these patients are already afflicted with the target disease, it is possible
that such studies may provide results traditionally obtained in Phase II
trials. These trials are referred to as Phase I/II trials.
Reports of results of the pre-clinical studies and clinical trials for
non-biological drugs are submitted to the FDA in the form of an NDA for
approval of the marketing and commercial shipment. The NDA also includes
information pertaining to the preparation of drug substances, analytical
methods, drug product formulation, details on the manufacture of finished
product as well as proposed product packaging and labeling. Submission of an
NDA does not assure FDA approval for marketing. The application review
process generally takes two to three years to complete, although reviews of
treatments for cancer and other life-threatening diseases may be accelerated
or expedited. However, the process may take substantially longer if, among
other things, the FDA has questions or concerns about the safety and/or
efficacy of a product. In general, the FDA requires at least two properly
conducted, adequate and well-controlled clinical studies demonstrating
efficacy with sufficient levels of statistical assurance. However, additional
information may be required. For example, the FDA also may request long-term
toxicity studies or other studies relating to product safety or efficacy.
Notwithstanding the submission of such data, the FDA ultimately may decide
that the application does not satisfy its regulatory criteria for approval.
Finally, the FDA may require additional clinical tests following NDA approval
to confirm product safety and efficacy (Phase IV clinical tests).
Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's GMP standards. In complying
with GMP standards, manufacturers must continue to expend time, money and
effort in production, recordkeeping and quality control to ensure that the
product meets applicable specifications and other requirements. The FDA
periodically inspects drug manufacturing facilities in order to ensure
compliance with applicable GMP requirements. Failure to so comply subjects
the manufacturer to possible FDA action, such as the suspension of
manufacturing, seizure of the product, or voluntary recall of a product.
The product testing and approval process is likely to take a substantial
number of years and involves the expenditure of substantial resources. There
can be no assurance that any approval will be granted on a timely basis, or
at all. The FDA also may require post-marketing testing and surveillance to
monitor the record of the product and continued compliance with regulatory
requirements. Upon approval, a drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosages. Adverse
experiences with the product must be reported to the FDA. The FDA also may
require the submission of any lot of the product for inspection and may
restrict the release of any lot that does not comply with FDA standards, or
may otherwise order the suspension of manufacture, recall or seizure. Product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems concerning safety or efficacy of the product occur
following approval.
In addition to applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales.
Whether
or not FDA approval has been obtained, approval of a product by the comparable
regulatory authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries. The approval
process varies from country to country and the time required may be longer or
shorter than that required for FDA approval.
(3) Orphan Drug Status. Under the Orphan Drug Act, the FDA may designate
drug products as orphan drugs if they are intended to treat a rare disease or
condition, which is defined as a disease or condition that affects less than
200,000 persons in the U.S., or if there is no reasonable expectation of
recovery of the costs of research and development from sales in the U.S.
Provided certain conditions are met, orphan drug status confers upon the
sponsor certain tax credits for amounts expended on clinical trials prior to
May 31, 1997, as well as marketing exclusivity for
17
seven years following FDA approval of the product. Marketing exclusivity
means that the FDA cannot approve another version of the same product for the
same use for seven years after approval of the first product. However, the
FDA can still approve a different drug for the same use or the same drug
for a different use. The FDA regulations implementing the Orphan Drug Act
define what drugs are the "same" for purposes of the seven year market
exclusivity provisions. The Company has been advised that nucleic acids and
other complex drugs may present potentially difficult orphan drug issues
under these regulations. The Company cannot predict how these provisions will
be implemented with respect to its RNA products and competitive drugs.
Certain benefits of orphan drug status are only available upon obtaining FDA
approval for marketing. For example, orphan drug exclusivity only vests in
the same designated product that is first to receive FDA marketing approval.
In 1993, Ampligen was designated as an orphan drug by the FDA for the
clinical indications of AIDS and renal cell carcinoma. The Company does not
believe that the former designation extends to HIV disease which has not
progressed to AIDS. In December 1993, the FDA designated Ampligen as an
orphan drug for the clinical indications of invasive malignant melanoma and
chronic fatigue syndrome. The FDA denied a request by the Company to
designate Ampligen as an orphan drug for chronic active HBV infection. There
is no assurance that any future products will receive orphan drug
designation, or that the benefits currently available from such designations
for Ampligen will not hereafter be amended or eliminated. Various legislative
proposals have from time to time been introduced in Congress to modify
various provisions of the Orphan Drug Act. Currently, Congress has
considered legislation that would amend the Orphan Drug Act and may limit the
scope of marketing exclusivity. The tax credit provisions expired on December
31, 1994 and was renewed by Congress in 1996.
(4) Diagnostic Products. The Company's potential Diagen diagnostic
products also must receive FDA clearance prior to any commercial marketing. The
FDC Act regulates most in vitro diagnostic products as medical devices, and
provides for two clearance mechanisms. Certain products may qualify for a
Section 510(k) procedure, under which the manufacturer gives the FDA a
premarket notification ("510(k) Notice") of the manufacturer's intent to
commence marketing the product. The manufacturer must establish that the
product to be marketed is "substantially equivalent" to another legally
marketed product which is subject to a 510(k) Notice or was commercially
marketed prior to May 28, 1976 and is not subject to premarket application
("PMA") requirements. In some cases, a 510(k) Notice must include data from
human clinical studies. Normally, marketing may commence when the FDA issues
an order to the manufacturer finding the product to be "substantially
equivalent." If the product does not qualify for the 510(k) procedure, the
manufacturer must file a PMA which includes results of extensive clinical and
nonclinical tests demonstrating that the product is both safe and effective.
The PMA process requires more intensive testing than the 510(k) procedure,
involves a significantly longer FDA review process, and usually requires
review by an FDA scientific advisory committee. Approval of a PMA allowing
commercial sale of a product requires that its safety and effectiveness be
demonstrated through human clinical studies, usually conducted under an
Investigational Device Exemption ("IDE"). Some diagnostic products may be
clinically tested without an FDA approved IDE. It is unknown at this time
whether an IDE will be required in order to clinically test Diagen products.
In responding to a PMA, the FDA may grant marketing approval, request
additional information or deny the application if it determines that the
application does not satisfy its regulatory approval criteria. There can be
no assurance that investigational or marketing approvals or clearances for
Diagen products will be granted to the Company.
Canadian Regulatory Process. The regulatory approval process in Canada of
pre-clinical and clinical trials, manufacturing and sales of drugs,
registration of establishments which manufacture biologics, compliance with
GMP requirements and periodic inspection by the Health Protection Bureau
("HPB") of the Canadian Department of Health and Welfare, which serves as the
federal drug agency in Canada, is in general similar to that in the United
States.
(a) Investigational New Drug Application. Before conducting clinical
trials of a new drug in Canada, a company must submit an IND application
to the HPB containing various information about the drug. In November
1992, the HPB approved the Company's INDs to conduct open-label and
controlled clinical trials of Ampligen for ME/CFS. There is no assurance
that the HPB will accept data obtained from those clinical trials in any
submission of the Company to the HPB to market Ampligen in Canada or that
such data, if accepted, will result in the approval of Ampligen for sale
in Canada. The HPB may place clinical trials on hold at any time if
safety concerns exist.
18
(b) New Drug Submission. Before marketing or selling a new drug in
Canada, the Company must submit a New Drug Submission ("NDS") to the HPB
and receive a notice of compliance from the HPB to sell the drug. The NDS
includes information describing the new drug, including its proper name,
the proposed name under which the new drug will be sold, the
specifications of the new drug, the methods of manufacturing, processing
and packaging the new drug, the controls applicable to these operations,
the tests conducted to establish the safety of the new drug, the tests to
be applied to control the potency, purity, stability and safety of the
new drug, the results of clinical trials and the effectiveness of the new
drug when used as intended. Submission of an NDS does not assure HPB
approval of a new drug for sale. If it determines the NDS meets the
requirements of Canada's Food and Drugs Act and Regulations, the HPB will
issue a notice of compliance for the new drug.
The HPB may deny approval of an NDS if applicable regulatory criteria are
not satisfied or may require additional testing. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the drug reaches the market. The HPB may require testing
and surveillance programs to monitor the new drug once commercialized.
Non-compliance with applicable requirements can result in fines and other
penalties, including product seizures and criminal prosecutions.
Among the requirements for product approval in Canada is the requirement
that a prospective manufacturer conform to the HPB's GMP and good laboratory
practices ("GLP") standards. Before manufacturing a biologic, a manufacturer
must have a license from the HPB that is specific to the site of manufacture.
The HPB periodically inspects the drug manufacturing site in order to ensure
compliance with Canada's Food and Drugs Act and Regulations and GMP and GLP
requirements. If there is a safety concern, the HPB, apart from other
sanctions, can suspend the manufacture of the product.
Certain provinces in Canada have the ability to determine whether the
costs of a drug sold within such province will be reimbursed by a provincial
government health plan by listing drugs on formularies. These provincial
formularies may affect the prices of drugs and the volume of drugs sold
within provinces. The Patented Medicines Prices Review Board has the ability
to assess whether the price of a patented medicine is excessive and, if
determined to do so, the Board has the ability to require the patent owner to
reduce the price of the patented medicine, to reduce the price of another
patented medicine or to remit money to the government.
Proposals have recently been made that, if implemented, would
significantly change Canada's drug approval system. Proposals include
establishing a separate agency for drug regulation and modeled on European
Community agencies. It is uncertain whether drugs such as the Company's would
be evaluated by this separate agency, and the Company is unable to predict
the impact, if any, on the transfer of regulatory responsibility from the HPB
to the separate agency. The Company is unable to predict whether these
proposals will be implemented or, if implemented, the effect thereof on the
Company.
Employees
As of January 31, 1997 the Company had 14 full-time employees. Of these
employees 9 were engaged in the Company's research, development,
manufacturing, regulatory affairs or pre-clinical testing, and 5 employees
performed general administrative functions including financial matters and
investor relations. In addition, on an as needed basis 8 individuals
employed at academic institutions serve as consultants or independent
contractors to the Company. Such persons are paid pursuant to licensing
agreements with 2 universities. There are 29 additional individuals who
serve or have served as part-time consultants or independent contractors to
the Company. In addition, to the individuals throughout the United States
from time to time are retained by the Company as independent contractors,
either on a per diem or monthly basis. The Company believes that it has been
successful in attracting skilled and experienced scientific personnel;
however, competition for such personnel is intense and there can be no
assurance that the Company will be able to attract and retain necessary
qualified employees and/or consultants in the future. None of the Company's
employees are covered by collective bargaining agreements.
19
Recent Developments
In March, 1997, The Company sold 5,000 shares of Series E Comvertible
Preferred Stock at $1,000 per share in a private offering pursuant to
Regulation D of the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. The proceeds of this placement were used to retire
the convertible preferred stock (Series D), which was placed under Regulation
D filing with the SEC during 1996. As a result of this transaction in 1997,
the Company will incur a $1.2 million stock compensation expense, however,
this will have no effect on the net equity of the company as it will be
offset by an increase in additional paid-in capital.
In January 1997, the Company began a Phase II clinical trial in Texas
treating HIV infected patients with Ampligen. The trial, approved by the FDA,
will study the effect of Ampligen on viral load, or burden, in HIV patients
with CD4 levels over 400 cells/mm who are not being treated with any other
HIV medications. The principal investigator in the trial, Dr. Patricia
Salvato, specializes in the treatment of individuals with HIV infection. Dr.
Salvato is a Clinical Associate Professor at the University of Texas Health
Science Center, and has participated in prior clinical trials of Ampligen for
various chronic viral diseases including HIV and CFS.
In December, 1996 the Company and Temple University settled their legal
disputes regarding the license agreement between the parties covering the
Oragen drugs. The parties signed the documents required to consummate their
settlement, which includes a worldwide license for the commercial sale of
Oragen products based on patents and related technology held by Temple. This
agreement was originally executed in 1988. In 1994, Temple terminated the
agreement, which caused the company to file legal action to re-instate the
1988 agreement.
In November, 1996, the Company announced that it will significantly
expand the enrollment of patients in Ampligen treatment programs in Belgium.
This expansion was at the request of the Belgium Investigator.
On October 15, 1996, results of a Belgium clinical study were presented
at the annual scientific meeting of the American Association for Chronic
Fatigue Syndrome (AACFS) evidencing that Ampligen produced significant
physical and cognitive improvements among patients suffering from Chronic
Fatigue Syndrome. The study was presented by Kenny De Meirleir, M.D., Ph.D.
from the University of Brussels, and by David S. Strayer, M.D., Professor of
Medicine at Allegheny University, PA, and Medical Director for the Company.
In September, 1996, Helix BioPharma Corp. (Helix) informed the Company
that it had confirmed the elegibility of Ampligen under Canada's Emergency
Drug Release Program to be made available in Canada to sufferers of HIV,
Renal Cancer, and Chronic Fatigue Syndrome. The Company thereupon shipped an
initial inventory of Ampligen to Helix and is in the process of producing
further supplies of Ampligen for Helix.
In July 1996, the Company unbundled its public stock unit (consisting of
one share of Common Stock and one Warrant to purchase Common stock). The
Common shares (HEMX), Warrants (HEMXW) as well as Units (HEMXU)
are now separately traded on NASDQ. The unit (HEMXU) ceased trading in
August, 1996.
On July 3, 1996, the Company issued and sold 6,000 shares of Series D
Convertible Preferred Stock ('the Preferred Stock") at $1,000 per share for
an aggregate total of $6,000,000. The proceeds, net of issuance costs,
realized by the Company were $5,395,885. In addition to the issuance of the
Preferred Stock, the Company issued to the buyer Warrants to purchase 100,000
shares of Common Stock at the strike price of $4.00 per share.
In June, 1996, R. Douglas Hulse joined the Company as Chief Operating
Officer (COO). Mr. Hulse serves as Executive Director of The Sage Group, a
healthcare consulting firm specializing in pharmaceutical and biotechnology
business development and strategic planning. In his role as COO, Mr. Hulse
serves as global coordinator interacting with various distributors and
corporate partners while insuring an adequate supply of drug for the
Company's expected commercial sales and expanded clinical programs.
20
In April, 1996, SAB/Bioclones reported significant accomplishments in
South Africa in fulfillment of their licensing agreement. Pilot production
runs of raw materials for use in manufacturing Ampligen were completed and
are being tested for conformity to Company specifications. SAB/Bioclones are
negotiating with two manufacturers to formulate the drug and to produce 200ml
infusion bottles (400mg Ampligen) for use in clinical trials. Discussions
also are underway with clinical investigators to identify suitable
participants for a controlled study of Ampligen in chronic active hepatitis
B. Clinical investigators then will be selected and patients enrolled for
studies. SAB/Bioclones has further reported interest among Hepatologists to
additionally evaluate Ampligen in the treatment of hepatitis C.
The Company resolved a long standing legal suit with a former note holder
of the Company. The litigation had been simultaneously pursued by the parties
in both the Federal Court of Eastern Pennsylvania as well as in the State
Court of Florida in Palm Beach County. The noteholder also filed a motion for
a preliminary injunction in the Pennsylvania court to enjoin the Company from
disbursing the proceeds of a public offering in the amount of $5.8 million,
which motion was granted in November, 1995. On February 15, 1996. the Company
reached an agreement to settle this matter. Terms and conditions of the
settlement included payment of $6,450,000 to the noteholder to cover the note
balance and legal expenses. The noteholder and related parties are to
maintain certain Warrants that were granted prior to the lawsuit. Other
Warrants granted to the noteholder in the note restructuring in 1994 were
relinquished. The funds under this settlement were paid on March 21, 1996.
Mutual releases were executed which completed the settlement of the
litigation.
In February, 1996, the Company entered into an agreement with Helix
BioPharma, a Canadian based pharmaceutical and biochemical and biomedical
company to jointly develop the Company's lead product for certain viral
disorders and diseases of immunological dysregulation. Helix BioPharma is the
parent company of Rivex Pharma, Inc. with which the Company has an agreement
for marketing and distribution services in Canada. Helix BioPharma,
headquartered in Richmond, British Columbia, is developing, licensing,
marketing and distributing biomedical and pharmaceutical products and
services principally to the Canadian markets.
The Company was a defendant in a lawsuit instituted in 1991 by
participants in a double-blind placebo-controlled clinical trial of Ampligen
therapy for ME/CFS. The plaintiffs alleged that the Company or its alleged
agents promised them that they would receive Ampligen after the placebo-
controlled study at no cost for periods ranging from "until marketable" or
"for life." Plaintiffs sought compensatory and punitive damages. The court
granted the Company's motions for summary judgement upon all claims alleged
by the plaintiffs in this case. The plaintiffs have appealed from these
orders before the United States Court of Appeals for the Ninth Circuit. In
January, 1996, the Court of Appeals denied their appeal and sustained the
Company's position. On the basis of the Court of Appeals favorable decision,
the Company believes the lawsuit is over with no material effect on the
Company.
21
Executive Officers
The executive officers of the Company, whose terms will expire at such
time as their successors are elected, are as follows:
Name Age Position Background
- -----------------------------------------------------------------------------
William A. Carter, M.D. 59 Chairman, Chief HEM Pharmaceuticals Corp.
Executive Officer, (the predecessor company)
President since 1978. Co-inventor of
record on more than 200
patents. A leading
innovator in the
development of human
interferon for a variety of
treatment indications.
Reasearch Career
Development awardee of NIH.
R. Douglas Hulse 53 Chief Operating The Sage Group
Officer (healthcare consulting),
since '95. Enzon, Inc.
(biopharmaceuticals),'91-'94
VP/Business Development,
Financial consultant to
biotechnology companies,
'86-'91.
Robert E. Peterson 60 Chief Financial Omni Group, Inc. (business
Officer consulting),VP. Formerly
the VP and CFO of several
Pepsico Divisions.
David R. Strayer, M.D. 51 Medical Director, Professor of Medicine at
Regulatory Affairs Medical College of
Pennsylvania and Hahneman
University. Formerly NIH
Research Associate.
Carol A. Smith, Ph.D. 45 Director, Virotech International,
Manufacturing and Inc. '89-91, Scientist/
Process Quality Assurance Officer.
Development
Josephine M. Dolhancryk 34 Treasurer, Medical/Business
Assistant Enterprises, '89-'90,
Secretary President.
Cedric C. Philipp 74 Director,Associate Philipp Pharmaceutical
Secretary, Marketing (consulting),
Special Advisor since '87, President.
to the Earlier, senior executive
Board/ for American Home
International Products, Wyeth
Laboratories in
International marketing
including South America
and Africa.
Peter Rodino, III 43 Director,Secretary Rodino and Rodino (law
firm), Managing Partner.
22
Richard Piani 70 Director Principal Delegate for
Industry to the City
of Science and Industry,
Paris, France, a
scientific and educational
complex since 1995.
Chairman of Industrielle du
Batiment-Morin, a building
materials corporation, from
1986-1993. Professor of
International Strategy at
Paris Dauphine University
from 1984-1993. Law degree
from Facilite de Droit,
Paris Sorbonne.
Administration degree from
Ecola des Hautes Etudes
Commerciales, Paris.
Harris Freedman 63 Vice President Business consultant for
for Strategic emerging technology
Alliances companies and private
venture capitalist.
Sharon Will 38 Vice President, Registered sales
Corporate representative,
Communications Worldwide Marketing Inc.(a
manufacturer's
representative)
E. Gerald Kay 58 Director Chairman of the Board
and Chief executive
Officer of Manhattan Drug
Co. Director of Carte
Medical Corp. Was
President and a director
of the Rexall Group, Inc.
- -----------------------------------------------------------------------------
ITEM 2. Properties
The Company leases and occupies a total of approximately 18,850 square
feet of laboratory and office space in two states. The corporate headquarters
in Philadelphia, Pennsylvania are located in a suite of offices of
approximately 15,000 square feet. The pharmacy, packaging, quality assurance
and quality control laboratories, as well as additional office space, are
located in Rockville, Maryland. These facilities occupy approximately 3,850
square feet, approximately 2,000 of which are dedicated to the packaging and
quality control product release functions. The Company believes that its
Rockville facilities will meet its production requirements, including
sufficient quantities of Ampligen for planned clinical trials, through 1997,
at which time it may need to increase its manufacturing capacity either
through third parties or by building or acquiring commercial-scale
facilities.
In addition, the Company has entered into the SAB Agreement, which
provides the Company with 24.9 % of the capital stock of a company to develop
and operate a new manufacturing facility to be financed by SAB/Bioclones.
Manufacturing at the pilot facility commenced in 1996. The Company expects
that manufacturing at the commercial facility will commence in 1998, although
no assurance can be given that this will occur.
ITEM 3. Legal Proceedings
The Company is subject to claims and legal actions that arise in the
ordinary course of their business. Management believes that the ultimate
liability, if any, with respect to these claims and legal actions will not
have a material effect on the financial position or results of operations of
the Company.
23
In March 1995, the Company instituted a declaratory judgment action
against the February 1992 noteholder of a $5 million convertible note and a
second defendant in the United State District Court for the Eastern District
of Pennsylvania ("the Pennsylvania action") to declare as void, set aside,
and cancel the February 1992 convertible note between the Company and the
noteholder ("the Note"). In addition, the noteholder instituted suit against
the Company on the Note in the Circuit Court of the 15th Judicial District in
and for Palm Beach County, Florida, seeking judgment on the note, plus
attorneys fees, costs and expenses; in August 1995, this
action was stayed by the Florida Court pending the outcome of the
Pennsylvania action. The noteholder also filed a motion for a preliminary
injunction in the Pennsylvania court to enjoin the Company from disbursing
the proceeds of a public offering in the amount of $5.8 million, which motion
was granted in November, 1995. On February 15, 1996, the Company reached an
agreement to settle this matter. Terms and conditions of the settlement
include payment of $6,450,000 to the noteholder to cover the unpaid note
balance and legal expenses. The noteholder and related parties returned
approximately 282,000 Common Stock Purchase Warrants that were granted prior
to the lawsuit. Other Warrants granted to the noteholder in the note
restructuring in 1994 were relinquished. The funds under this settlement were
paid on March 21, 1996. Mutual releases were executed which completed the
settlement of the litigation.
In November 1994, the Company filed suit against Temple University
("Temple") in the Superior Court of the State of Delaware ("Superior Court")
seeking a declaratory judgment that the Temple Agreement remains in full
force and effect and seeking monetary damages in excess of $10 million for
Temple's alleged breach of its obligations of good faith and fair dealing and
certain terms of the Temple Agreement. Temple filed a motion to dismiss this
lawsuit upon the grounds of lack of personal jurisdiction. In January 1995,
Temple filed separate litigation against the Company in the Court of Common
Pleas of Philadelphia County seeking declaratory judgment that the Temple
Agreement has been lawfully terminated as of July 1, 1994, together with an
award of costs including attorney fees, in bringing the action. The Company
and Temple settled their dispute in December, 1996, dropping all litigation
and reinstating the 1988 license agreement.
The Company was a defendant in a lawsuit instituted in 1991 by
participants in a double-blind placebo-controlled clinical trial of Ampligen
therapy for ME/CFS. The plaintiffs alleged that the Company or its alleged
agents promised them that they would receive Ampligen after the
placebo-controlled study at no cost for periods ranging from "until
marketable" to "for life. " Plaintiffs sought compensatory and punitive
damages. The court granted the Company's motions for summary judgment upon
all claims alleged by the plaintiffs in this case. The plaintiffs have
appealed from these orders before the United States Court of Appeals for the
Ninth Circuit. In January 1996, the Court of Appeals denied their appeal and
sustained the Company's position. On the basis of the Court of Appeals
favorable decision, the Company believes the lawsuit is concluded with no
current or future material effect on the Company's financial position.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
24 PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
On November 2, 1995 the Company's units (Consisting of one share of Common
Stock and one Class A Redeemable Warrant) commenced trading on the National
Association of Securities Dealers Automated Quotation Small Cap Market
("NASDAQ SYSTEM") under the symbol "HEMXU." In July, 1996, the Company
unbundled its public unit allowing the Common Stock (HEMX) the Class A
Warrant (HEMXW) and the Unit (HEMXU) to trade separately. In August 1996 the
Company authorized NASDAQ to delist the Unit (HEMXU) and cease trading it.
The following table sets forth the high and low list prices for the Unit,
the Common Stock and the Warrant for the periods indicated as reported by
NASDAQ. Such prices reflect inter-dealer prices, without retail markup,
mark-down or commissions and may not necessarily represent actual transactions.
UNITS (HEMXU) High Low
------- ------
Time Period:
November 2, 1995 through
December 31, 1995 $8.625 $2.000
January 1, 1996 through
March 31, 1996 3.687 1.750
April 1, 1996 through
June 30, 1996 6.125 2.687
July 1, 1996 through
August 15, 1996 (Trading 4.188 2.188
ceased on August 16, 1996)
COMMON STOCK (HEMX) High Low
----- ------
Time Period:
July 15, 1996 through
September 30, 1996 $5.125 $1.625
October 1, 1996 through
December 31, 1996 4.813 2.063
WARRANTS (HEMXW)
High Low
Time Period: ------ ------
July 15, 196 through
September 30, 1996 $1.875 $0.500
October 1, 1996 through
December 31, 1996 1.813 0.625
25
As of December 31, 1996 there were approximately 329 holders of record of
the Company's Common Stock. this number was determined from records
maintained by the Company's transfer agent and does not include beneficial
owners of the Company's securities whose securities are held in the names of
various dealers and/or clearing agencies.
As of December 31, 1996, the Company had 6,775,000 Class A Redeemable
Warrants registered and outstanding.
The Company has never paid any dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock,
but to retain earnings, if any, for the operation and expansion of the
Company's business.
26
ITEM 6. Selected Financial Data
Year Ended December 31 1992 1993 1994 1995 1996
------- ------ ------ ------ ------
Summary of Operations
Net revenues $ -- $ 48,000 $ 175,758 $2,965,910 $ 32,044
Net loss (7,880,648) (7,702,050) (5,133,051) (1,839,840)(4,554,489)
Proforma weighted average
number of shares
and share equivalents
outstanding -- 6,998,072 11,536,276 14,199,701 15,718,136
Financial Data
Cash used in operating
activities (6,335,097) (5,170,638) (1,952,145) (1,939,219)(6,097,906)
Capital expenditures (53,795) (40,000) (3,625) (86,480)
Total assets 4,414,580 1,915,681 1,651,441 12,699,518 6,999,384
Total debt 6,920,000 7,700,000 8,470,910 4,920,000
Redeemable preferred
stock 2,536,090 2,865,782 3,238,334 4,496,571
Common stockholders
equity (deficit) (7,821,374)(11,579,156)(14,629,687) 4,420,785 5,852,994
Proforma per share data
Net loss -- -- (0.44) (0.13) (0.29)
Book value -- -- (1.27) 0.31 0.37
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto, which are included
herein.
Background
The Company was incorporated in Maryland in 1966 under the name HEM
Research, Inc. and originally served as a supplier of research support
products. The Company's business was redirected in the early 1980's to the
development of nucleic acid pharmaceutical technology and the
commercialization of RNA drugs. The Company was reincorporated in Delaware
and changed its name to HEM Pharmaceuticals Corp. in 1991 and to Hemispherx
BioPharma, Inc. in June 1995. The Company has three subsidiaries--BioPro
Corp., BioAegean Corp. and Core BioTech Corp., all of which were incorporated
in Delaware in 1994. The Company has reported net profit only from 1985
through 1987. Since 1987, the Company has incurred substantial operating
losses. Prior to completing an Initial Public Offering (IPO) in November
1995, the Company financed operations primarily through the private placement
of equity and debt securities, equipment lease financing, interest income and
revenues from licensing and royalty agreements.
The IPO completed in November 1995 produced net proceeds of approximately
$16,000,000. These funds plus the conversion of $3,447,000 in Redeemable
Preferred Stock to equity improved stockholders equity by some
27
$19,000,000. The cash proceeds from the IPO was used to retire debt and other
liabilities and establish a fund for future operations.
The development of the Company's products has required and will continue
to require the commitment of substantial resources to conduct the
time-consuming research, preclinical development, and clinical trials
necessary to bring pharmaceutical products to market and establish commercial
production and marketing capabilities. Accordingly, the Company will need to
raise additional funds through additional equity or debt financing,
collaborative arrangements with corporate partners, off balance sheet
financing or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin commercializing its
products.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries, BioPro
Corp., BioAegean Corp. and Core BioTech Corp. which were incorporated in
September 1994 for the purpose of developing technology for ultimate sale
into certain nonpharmaceutical specialty consumer markets. All significant
intercompany balances and transactions have been eliminated in consolidation.
During fiscal 1994 and 1995, the Company has focused on negotiating and
executing the SAB Agreement, exploring potential partnerships to pursue
additional clinical trials with special emphasis on the HBV disease
indication, restructuring certain of its outstanding debt, conducting the
1994 Common Stock Financing and the Bridge Financing and completing its IPO.
In 1996, the Company reviewed and restructured the Ampligen manufacturing
process. Second sources were established to procure raw materials,
lyophilization services and release testing. In the areas of research and
clinical efforts, the Company established with the FDA a roadmap of research
and clinical studies to be completed . These studies include animal toxicity
and clinical studies in HIV and CFS. One HIV clinical study was approved by
the FDA and started in late 1996. Certain animal toxicity studies began. In
addition, the Company shipped the initial inventory of Ampligen to Canada to
use in its cost recovery program there.
The Company expects to continue its research and clinical efforts for the
next several years with some benefit of certain revenues from cost recovery
programs, notably in Canada and Belgium. Beginning in October, 1993, limited
revenues were initiated in Belgium from sales under the cost recovery
provision for conducting clinical tests in ME/CFS. The Company expects to
continue incurring losses over the next several years due to clinical costs
which are only partially offset by revenues and potential licensing fees.
Such losses may fluctuate from quarter to quarter as a result of differences
in the timing of significant expenses incurred and receipt of licensing fees
and/or revenues.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 vs. 1995
- --------------------------------------
The Company reported a net loss of $4,554,489 in 1996 versus a loss of
$1,839,840 in 1995. Several factors contributed to the increased loss of
$2,714,649.
Revenues were down $2,933,866 for 1996 as 1995 included $2,900,000 of
licensing fees recorded in connection with SAB/Bioclones agreement. Research
and development costs increased $873,665 in 1996 due primarily to increased
efforts on the Canadian and Belgium clinical programs. General and
administrative expenses of $3,023,590 in 1996 reflect the benefit of a one
time gain in the amount of $318,757 resulting from the forgiveness of certain
lease obligations in connection with the restructuring of the Company's
principal office lease. Excluding this one time gain, general and
administrative expenses in 1996 exceeded related expenses in 1995 by
$461,904. This increase can mostly be attributed to stock compensation
expense of $634,344 and certain consulting fees.
Debt conversion costs of $149,384 and interest expense of $843,148
incurred in 1995 did not recur in 1996 due the fact that all the associated
debt was converted or repaid in 1995. Interest income increased by $243,497
due to the earnings on the remaining IPO funds and funds from the issuance of
preferred stock.
28
Years Ended December 31, 1995 vs. 1994
- --------------------------------------
The Company reported revenues of $2,965,910 in 1995 versus $175,758 in
1994. In 1995, the Company received and recognized $2,900,000 in licensing
fees resulting from the SAB/Bioclones agreements as compared to $100,000 in
1994. Revenues from cost recovery clinical trials were $65,910 in 1995 versus
$75,758 in 1994. Net losses of $1,839,840 were incurred in 1995 versus
losses of $5,133,051 in 1994. The year to year improvement of $3,293,211
basically consists of: (1) $2,790,152 in higher revenues primarily due to
the licensing fees received from the SAB Agreement, (2) $609,107 or 37% in
lower research and development costs as a result of the winddown and
completion of certain clinical trials, (3) higher general and administrative
costs of $262,681 or 10% basically due to increased legal and professional
fees associated with various legal matters and the Company's IPO efforts, (4)
$138,884 in higher debt conversion expense relating to certain debt
restructuring that took place in April, 1995, and (5) lower net interest
expense in the amount of $295,517 or 28% due to the paydown of certain notes
from the proceeds of the IPO.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995 the Company had cash and cash equivalents of
$11,291,167 primarily as a result of the November 2, 1995 IPO. This figure
includes $5,818,733 of restricted funds as ordered by the Court in connection
with the Cohn litigation. In addition, certain officers, directors and
shareholders extended their 1995 standby financing agreement to December 31,
1996. In this agreement, the parties agreed to provide funding up to
$5,500,000 to the Company in the event that existing or additional financing
was insufficient to cover the cash needs of the Company through December 31,
1996. In February, 1996, the Company reached an agreement to settle the Cohn
litigation. Terms and conditions of the settlement include the payment of
$6,450,000 to Cohn to cover the note balance and legal expenses. In July,
1996, the Company issued and sold 6,000 shares of Series D Convertible
Preferred Stock at $1,000 per shares for an aggregate total of $6,000,000.
The proceeds, net of issuance cost, was approximately $5,400,000. this
preferred stock earns dividends at the rate of $50 per annum per share. In
October, 1996 the Preferred Shareholder converted 1,000 preferred shares
into 376,530 shares of common stock.
As of December 31, 1996 the Company had $5,279,429 in cash and cash
equivalents. This cash plus anticipated interest income, licensing fees, and
revenues from product sales in Canada and Belgium in 1997 should be
sufficient to cover the Company's cash needs in 1997. However, because of the
Company's long-term requirements, it may seek to access public equity market
whenever conditions are favorable, even if it does not have an immediate need
for additional capital at that time. Any additional funding may result in
significant dilution and could involve the issuance of securities with rights
which are senior to those of existing stockholders. The Company may also need
additional funding earlier than anticipated, and the Company's cash
requirements in general may vary materially from those now planed, for
reasons including, but not limited to, changes in the Company's research and
development programs, clinical trials, competitive and technological
advances, the regulatory process, and higher than anticipated expenses and
lower than anticipated revenues from certain of the Company's clinical trials
as to which cost recovery from participants has been approved.
In March, 1997, the Company used the services of an investment banking
firm to privately place $5 million of Series E Convertible Preferred Stock.
The proceeds from this placement were used to retire the $5 million balance
of Series D Convertible Stock issued in July of 1996. As a result of this
transaction in 1997, the Company will incur a $1.2 million stock
compensation expense, however, this will have no effect on the net equity of
the company as it will be offset by an increase in additional paid-in
capital.
ITEM 8. Financial Statements and Supplementary Data
The Company's consolidated balance sheets as of December 31, 1995 and
1996, consolidated statements of operations, stockholder's equity(deficit)
and cash flows for each of the years in the three year period ended December
31, 1996, together with the report of KPMG Peat Marwick, LLP, independent
public accountants are included
29
elsewhere herein. Reference is made to the "Index to Financial statements and
Financial Statement Schedule" on page 34.
ITEM 9. Changes in the Disagreements with Accountants on Accounting and
Financial Disclosures
None
30
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from
the information under the caption "Management" contained in the Company's
definitive Proxy Statement which will be filed with the Securities and
Exchange Commission on or before April 30, 1996 in connection with the
solicitation of proxies for the Company's 1996 Annual Meeting of Stockholders
scheduled to be held on or about June 24, 1996 (the "Proxy Statement").
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
information under the captions "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
31
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1)(2)Financial Statements and Schedules - See index to financial statements
and financial statement schedule on page 34 of this Annual Report.
(a)(3) Exhibits - See exhibit index below.
(b) The Company has not filed any reports on Form 8K during the year ended
December 31, 1996.
(c) The following exhibits were filed with the Securities and Exchange
Commission as exhibits to the Company's Form S-1 Registration
Statement (No. 33-93314) or amendments thereto and are hereby
incorporated by reference. Exhibits marked with a star are filed
herewith:
EXHIBIT NO. DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of Registrant, as
amended, along with Certificates of Designations, Rights and
Preferences of Series Al, A2, B and C Preferred Stock.
3.2 By-laws of Registrant, as amended
4.1 Specimen certificate representing Registrant's Common Stock
4.2 Form of Class A Redeemable Warrant Certificate
4.3 Form of Underwriter's Unit Option Purchase Agreement
4.4 Form of Class A Redeemable Warrant Agreement with Continental
Stock Transfer and Trust Company
10.1 Registration Rights Agreement, dated as of May 9, 1989
10.2 Subordination Agreement, dated as of September 18, 1992
10.3 Series Al and Series A2 Preferred Stock Purchase Agreement, dated as
of January 22, 1991
10.4 Sixth Amendment Agreement, dated as of March 31, 1994, amending the
Series Al and Series A2 Preferred Stock Purchase Agreement
10.5 Seventh Amendment Agreement, dated as of January 1, 1995, amending
the Series A1 and Series A2 Preferred Stock Purchase Agreement
10.6 Form of Series C Preferred Stock Subscription Agreement, dated as of
June 22, 1993
10.7 Form of Series C Debt Subscription Agreement, dated as of June 30,
1993
10.8 Form of Note issued with respect to Series C Debt Subscription
Agreement, dated as of June 30,1993
10.9 Form of Warrant issued with respect to Series C Debt Subscription
Agreement, dated as of June 3, 1993
10.10 Cohn Restructuring Agreement, dated as of March 31, 1994
10.11 Form of Warrant issued with respect to Cohn Restructuring Agreement,
dated as of March 31, 1994.
10.12 Note issued with respect to Cohn Restructuring Agreement, dated as
of March 31, 1994
10.13 Letter Agreement, dated April 14, 1994 between the Registrant and
Maryann Charlap and Promissory Note
10.14 Letter Agreement, dated July 13, 1994 between Bridge Ventures, Inc.
and the Registrant
10.15 Letter Agreement, dated September 20, 1994 between Maryann Charlap
and Lloyd DeVos
10.16 Letter Agreement, dated November 1, 1994 among the Registrant,
Bridge Ventures, Inc. and Myron Cherry
10.17 Form of Bridge Loan Agreement and Promissory Note
10.18 [Intentionally left blank]
10.19 Form of Registration Rights Agreement issued pursuant to 1994 Common
Stock Financing Subscription Agreement
10.20 Form of Proxy issued pursuant to 1994 Common Stock Financing
Subscription Agreement
10.21 Standby Financing Agreement, dated June 2, 1995, as amended
September 20, 1995
10.22 Tish/Tsai Entities Stock Pledge Agreement, dated February 28, 1995
10.23 Tish/Tsai Entities Settlement Agreement, dated February 28, 1995
32
10.24 Form of Promissory Note with Tisch/Tsai Entities
10.25 Form of Warrant with Tisch/Tsai Entities
10.26 Letter Agreement, dated May 4, 1995 between the Registrant and
Gerald Brauser
10.27 Brauser Note, dated May 2, 1995
10.28 1990 Stock Option Plan
10.29 1992 Stock Option Plan
10.30 1993 Employee Stock Purchase Plan
10.31 Form of Confidentiality, Invention and Non-Compete Agreement
10.32 Form of Clinical Research Agreement
10.33 Form of Collaboration Agreement
10.34 Employment Agreement by and between the Registrant and John R.
Rapoza, dated May 18, 1992
10.35 Employment Agreement by and between the Registrant and James R.
Owen, dated September 21, 1992
10.36 Amended and Restated Employment Agreement by and between the
Registrant and Dr. William A. Carter, dated as of July 1, 1993
10.37 Employment Agreement by and between the Registrant and Harris
Freedman, dated August 1, 1994
10.38 Employment Agreement by and between the Registrant and Sharon Will,
dated August 1, 1994
10.39 License Agreement by and between the Registrant and The Johns
Hopkins University, dated December 31, 1980
10.40 Technology Transfer, Patent License and Supply Agreement by and
between the Registrant, Pharmacia LKB Biotechnology Inc., Pharmacia
P-L Biochemicals Inc. and E.I. du Pont de Nemours and Company, dated
November 24, 1987
10.41 Pharmaceutical Use Agreement, by and between the Registrant and
Temple University, dated August 3, 1988
10.42 Assignment and Research Support Agreement by and between the
Registrant, Hahnemann University and Dr. David Strayer, Dr. lsadore
Brodsky and Dr. David Gillespie, dated June 30, 1989
10.43 Lease Agreement between the Registrant and Red Gate m Limited
Partnership, dated November 1, 1989, relating to the Registrant's
Rockville, Maryland facility
10.44 Fee Agreement between the Registrant and Choate, Hall & Stewart,
dated January 27, 1993
10.45 Settlement and Release Agreement between the Registrant and Lloyd
DeVos, dated August 18, 1994
10.46 Agreement between the Registrant and Bioclones (Proprietary) Limited
10.47 Licensing Agreement with Core BioTech Corp.
10.48 Licensing Agreement with BioPro Corp.
10.49 Licensing Agreement with BioAegean Corp.
10.50 Letter Agreement, dated May 12, 1992, between the Registrant and
Dr. Werner E.G. Muller
10.51 Amendment, dated August 3, 1995, to Agreement between the
Registrant and Bioclones (Proprietary) Limited (contained in Exhibit
(10.46)
1O.52 Agreement, dated July 16, 1995, between the Registrant, Vernacular
Communications, Inc, Gerard Souham, Mitchell L Reisman, Craig S.
O'Keefe and Robert C. Conaboy
10.53 Agreement, dated June 27,1995, between the Registrant and The Sage
Group
10.54 Form of Indemnification Agreement
10.55 Agreement, dated September 13, 1995, between the Registrant and
Rivex Pharma Inc.
21 Subsidiaries of the Registrant
(d) Financial Statement Schedules required by this Item are
identified on page 34 of this Annual Report.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
HEMISPHERx BIOPHARMA, INC.
/s/ William Carter, M.D.
By: -------------------------
William A. Carter, M.D.
Chief Executive Officer
March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ WIlliam A Carter Chairman of the Board, Chief March 14, 1997
- ------------------------- Executive Officer and Director
William A. Carter
/s/ Peter Rodino III Secretary and Director March 17, 1997
- ------------------------
Peter Rodino, III
/s/ Cedric C.Philipp Director March 19, 1997
- ------------------------
Cedric C. Philipp
/s/ Richard Piani Director March 18, 1997
- ------------------------
Richard Piani
Director March __, 1997
- ------------------------
E. Gerald Kay
/s/ R. Douglas Hulse Chief Operating Officer March 18, 1997
- ------------------------
R. Douglas Hulse
/s/ Robert E. Peterson Chief Financial Officer March 14, 1997
- ------------------------
Robert E. Peterson
34
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report. . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 . . F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1996 F-4
Consolidated Statements of Stockholders' Equity for each
of the years in the three-year period ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-8
PAGE 35
Independent Auditors' Report
The Board of Directors and Stockholders
Hemispherx BioPharma, Inc.:
We have audited the accompanying consolidated balance sheets of
Hemispherx BioPharma, Inc. and subsidiaries (the Company) as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Hemispherx BioPharma, Inc. and subsidiaries as of December 31, 1995 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 14,1997
Philadelphia, Pennsylvania
36 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1996
December 31,
-------------------------
1995 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents. . . . . $11,291,167 $5,279,429
Prepaid expenses and
other current assets (Note 11) . 62,742 105,341
----------- ----------
Total current assets. . . . . . 11,353,909 5,384,770
Property and equipment, net . . . . 53,953 83,475
Patent and trademarks rights, net . 1,245,092 1,502,816
Security deposits . . . . . . . . . 46,564 28,323
----------- ----------
Total assets. . . . . . . . . . $12,699,518 $ 6,999,384
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . $ 1,095,637 $ 598,078
Accrued expenses (Note 5). . . . . 2,263,096 548,312
Notes payable (Note 3) . . . . . . 4,920,000 --
----------- ----------
Total current liabilities . . . 8,278,733 1,146,390
Commitments and contingencies
(Notes 3, 6, 8, 9, 10, 11, 12 and 14)
Stockholders' equity
(Notes 6 and 7):
Preferred stock . . . . . . . . . -- 50
Common stock. . . . . . . . . . . 15,581 16,160
Additional paid-in capital. . . . 47,949,530 54,080,171
Accumulated deficit . . . . . . . (43,544,326) (48,243,387)
------------ -----------
Total stockholders' equity. . . 4,420,785 5,852,994
------------ -----------
Total liabilities and
stockholders' equity. . . $12,699,518 $ 6,999,384
============ ===========
See accompanying notes to consolidated financial statements.
37 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1996
December 31,
---------------------------
1994 1995 1996
------- ------- ------
Revenues:
Research and development . . . . $ 75,758 $ 65,910 $ 32,044
License fees . . . . . . . . . . 100,000 2,900,000 --
-------- --------- ----------
Total revenues. . . . . . . . 175,758 2,965,910 32,044
Costs and expenses:
Research and development . . . . 1,637,769 1,028,662 1,902,327
General and
administrative (Notes 10 ) 2,617,762 2,880,443 3,023,590
--------- --------- ----------
Total cost and expenses . . . 4,255,531 3,909,105 4,925,917
Debt conversion expense . . . . . (10,500) (149,384) --
Interest income . . . . . . . . . 25,091 95,887 339,384
Interest expense (Note 14). . . . (1,067,869) (843,148) --
--------- --------- ---------
Net loss. . . . . . . . . . .$(5,133,051) $(1,839,840) $(4,554,489)
========= ========= =========
Pro forma net loss per share (Note 2(e)):
Pro forma weighted average shares
outstanding. . . . . . . . . . 11,536,276 14,199,701 15,718,136
========== ========== ==========
Pro forma net loss per share. $ (.44) $ (.13) $ (.29)
========== ========== ==========
See accompanying notes to consolidated financial statements.
38 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity(Deficit)
For each of the years in the three-year period ended December 31, 1996
Preferred Common
Stock Stock Preferred Common
subscribed subscribed stock stock
shares shares shares shares
--------- --------- --------- ----------
Balance at December 31, 1993. . . . 517,512 28,026 810,029 5,133,986
Preferred stock subscribed . . . . 130,000 -- -- --
Debt to preferred/common
stock conversion. . . . . . . . . 3,600 300,000 -- 2,770
Redeemable preferred stock
dividend. . . . . . . . . . . . . -- -- -- --
Warrants issued in connection
with imputed and forgiven in-
terest charges. . . . . . . . . . -- -- -- --
Issuance of stock purchase war-
rants, net. . . . . . . . . . . . -- -- -- --
Common stock subscribed . . . . . . -- 1,750,000 -- --
Stock options exercised . . . . . . -- 4,926 -- --
Net loss . . . . . . . . . . . . . -- -- -- --
--------- --------- --------- ----------
Balance at December 31, 1994. . . . 651,112 2,082,952 810,029 5,136,756
Redeemable preferred stock
dividend . . . . . . . . . . . . -- -- -- --
Debt to preferred stock
dividend . . . . . . . . . . . . -- -- 172,414 --
Warrants issued in connection
with imputed and forgiven
interest charges . . . . . . . . -- -- -- --
Preferred stock subscribed. . . . . 10,000 -- -- --
Debt to common stock
conversion . . . . . . . . . . . -- 100,000 -- --
Issuance of common stock
certificates . . . . . . . . . . -- (2,182,952) -- 2,182,952
Issuance of Preferred Stock
certificates . . . . . . . . . . (626,112) -- 626,112 --
Convert Redeemable to Common. . . . -- -- -- 343,879
Convert Preferred to Common . . . . ( 35,000) --(1,608,555) 1,807,088
Issuance of Common Stock,
net of issuance cost. . . . . . . -- -- -- 5,313,000
Warrants Exercised. . . . . . . . . -- -- -- 797,917
Net Loss. . . . . . . . . . . . . . -- -- -- --
--------- --------- --------- ----------
Balance at December 31, 1995. . . . -- -- -- 15,581,592
Warrants Exercised .. . . . . . . . -- -- -- 202,083
Preferred Stock Issued. . . . . . . -- -- 6,000 --
Preferred Stock Converted . . . . . -- -- (1,000) 376,530
Stock Option Compensation . . . . . -- -- -- --
Net loss. . . . . . . . . . . . . . -- -- -- --
Preferred Dividends . . . . . . . . -- -- -- --
---------- --------- --------- ----------
Balance at December 31, 1996 . . . -- -- 5,000 16,160,205
========== ========= ========= ==========
See accompanying notes to consolidated financial statements.
39 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity(Deficit)-CONTINUED
For each of the years in the three-year period ended December 31, 1996
"C" Common stock
---------------------- Common
Preferred Common .001 Additional stock Total
Stock Stock Preferred Par paid-in Accumulated subscriptions Stockholder's
subscribed subscribed stock value captal deficit receivable equity(deficit)
---------- ---------- --------- ----- -------- ------- ---------- ---------------
Balance at December 31, 1993. . . $4,093,733 $30,227 $7.200.017 $5,133 $13,663,169 $(36,571,435) -- $(11,579,156)
Preferred stock subscribed . . . 650,000 -- -- -- -- -- -- 650,000
Debt to preferred/common
stock conversion. . . . . . . . 28,500 150,000 -- 3 1,382 -- -- 179,885
Redeemable preferred stock
dividend. . . . . . . . . . . . -- -- -- -- (372,552) -- -- (372,552)
Warrants issued in connection
with imputed and forgiven in-
terest charges. . . . . . . . . -- -- -- -- 631,583 -- -- 631,583
Issuance of stock purchase war-
rants, net. . . . . . . . . . . -- -- -- -- 112,500 -- -- 112,500
Common stock subscribed . . . . . -- 875,000 -- -- -- -- -- 875,000
Stock options exercised . . . . . -- 6,104 -- -- -- -- -- 6,104
Net loss . . . . . . . . . . . . -- -- -- -- -- (5,133,051) -- (5,133,051)
---------- --------- --------- --------- --------- ----------- ----------- ------------
Balance at December 31, 1994. . . 4,772,233 1,061,331 7,200,017 5,136 14,036,082 (41,704,486) -- (14,629,687)
Redeemable preferred stoc
dividend . . . . . . . . . . . -- -- -- -- (314,873) -- -- (314,873)
Debt to preferred stock
dividend . . . . . . . . . . . -- -- 749,383 -- -- -- -- 749,383
Warrants issued in connection
with imputed and forgiven
interest charges . . . . . . . -- -- -- -- 572,681 -- -- 572,681
Preferred stock subscribed. . . . 50,000 -- -- -- -- -- -- 50,000
Debt to common stock
conversion . . . . . . . . . . -- 50,000 -- -- -- -- -- 50,000
Issuance of common stock
certificates . . . . . . . . . --(1,111,331) -- 2,183 1,109,148 -- -- --
Issuance of Preferred Stock
certificates . . . . . . . . . (4,472,233) -- 4,472,233 -- -- -- -- --
Convert Redeemable to Common. . . -- -- -- 344 3,552,863 -- -- 3,553,207
Convert Preferred to Common . . . (350,000) --(12,421,633) 1,807 12,769,826 -- -- --
Issuance of Common Stock,
net of issuance cost. . . . . . -- -- -- 5,313 15,825,644 -- -- 15,830,957
Warrants Exercised. . . . . . . . -- -- -- 798 398,159 -- -- 398,957
Net Loss. . . . . . . . . . . . . -- -- -- -- -- (1,839,840) -- (1,839,840)
Balance at December 31, 1995. . . -- -- -- 15,581 47,949,530 (43,544,326) -- 4,420,785
Warrants Exercised .. . . . . . . -- -- -- 202 100,839 -- -- 101,041
Preferred Stock Issued. . . . . . -- -- 60 -- 5,395,825 -- -- 5,395,885
Preferred Stock Converted . . . . -- -- (10) 377 (367) -- -- --
Stock Option Compensation . . . . -- -- -- -- 634,344 -- -- 634,344
Net loss. . . . . . . . . . . . . -- -- -- -- -- (4,554,489) -- (4,554,489)
Preferred Dividends . . . . . . . -- -- -- -- -- (144,572) -- (144,572)
---------- --------- --------- -------- --------- ----------- ---------- -----------
Balance at December 31, 1996 . . -- -- 50 16,160 $54,080,171 $(48,243,387) -- $ 5,852,994
========== ========= ========= ======== ========= =========== ========== ===========
See accompanying notes to consolidated financial statements.
40 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended December 31, 1996
Increase (Decrease) in Cash and Cash Equivalents
December 31,
-----------------------------
1994 1995 1996
------ ------ ------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . $(5,133,051) $(1,839,840) $(4,554,489)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment. . . . . . . . . . . 115,061 54,000 56,958
Amortization of patent rights . . . 256,341 222,000 90,935
Issuance of stock purchase warrants 112,500 -- --
Imputed interest charges. . . . . . 150,000 41,360 --
Debt conversion expense . . . . . . 10,500 149,384 --
Write-off of patent rights. . . . . 285,190 100,017 41,156
Stock option compensation expense . -- -- 634,344
Gain on disposal of property and equipment 17,197 -- --
Changes in assets and liabilities:
Prepaid expenses and other current assets (1,506) (59,985) (42,599)
Accounts payable . . . . . . . . . 661,732 (1,156,084) (497,559)
Accrued expenses . . . . . . . . . 1,565,450 547,561 (1,844,893)
Security deposits. . . . . . . . . 8,441 2,368 18,241
---------- ---------- ----------
Net cash used in
operating activities. . . . . . (1,952,145) (1,939,219) (6,097,906)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment . (40,000) (3,625) (86,480)
Proceeds from disposal of
property and equipment . . . . . . 11,000 -- --
Additions to patent rights . . . . . (351,470) (132,689) (389,815)
---------- ---------- ----------
Net cash used in investing
activities . . $ (380,470) $ (136,314) $ (476,295)
---------- ---------- ----------
(CONTINUED)
See accompanying notes to consolidated financial statements.
41 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
December 31,
----------------------------
1994 1995 1996
----- ---- ----
Cash flows from financing activities:
Proceeds from issuance of
preferred stock. . . . . $ -- $ -- $ 5,395,885
Proceeds from shareholder loans. . . 925,910 35,000 --
Proceeds from notes payable. . . . . 35,000 1,762,000 --
Payments on notes payable. . . . . . (80,000) (1,837,000) --
Payments on stockholder notes. . . . (10,000) (2,860,911) (4,920,000)
Principal payments under capital
lease obligation. . (6,923) (23,308) --
Common stock subscription proceeds . 875,000 -- --
Preferred stock subscription
proceeds . . . 650,000 -- --
Proceeds from issuance of
common stock. . . 18,595,000 --
Stock issuance costs . . . . . . . . -- (2,764,043) --
Proceeds from exercise of
stock warrants. . -- 398,957 101,040
Dividends paid on preferred stock. . -- -- (14,463)
--------- ---------- ---------
Net cash provided by
financing activities. . . . . . 2,388,987 13,305,695 562,463
--------- ---------- ---------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . 56,372 11,230,162 (6,011,738)
Cash and cash equivalents at
beginning of period. . . 4,633 61,005 11,291,167
--------- ---------- ----------
Cash and cash equivalents
at end of period . $ 61,005 $11,291,167 $ 5,279,429
========= ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year
for interest. . . $ -- $ 186,503 $ 3,999
========= ========== ==========
Supplemental disclosure of noncash investing activities:
Debt to equity conversion. . . . . . $ 100,000 $ 799,383 $ --
Accounts payable and accrued expenses to
equity conversion . . . . . . . . . 74,104 50,000 --
Forgiveness of interest. . . . . . . 458,333 572,681 --
Preferred stock to equity conversion. . $ -- $ 3,238,334 $ 899,314
See accompanying notes to consolidated financial statements.
42 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) Business
Hemispherx BioPharma, Inc. and subsidiaries (the Company), formerly known as
HEM Pharmaceuticals Corp., is a pharmaceutical company using nucleic acid
technologies to develop therapeutic products for the treatment of viral
diseases and certain cancers. The Company's drug technology uses
specially-configured ribonucleic acid (RNA). The Company's double-stranded RNA
drug product, trademarked Ampligen, is in human clinical development for
various therapeutic indications. The efficacy and safety of Ampligen is being
developed clinically for three anti-viral indications: myalgic
encephalomyelitis, also known as chronic fatigue syndrome (ME/CFS) (Phase II
clinical trial completed and Phase II/III clinical trial authorized); human
immunodeficiency virus associated disorders (Phase II clinical trial); and
chronic hepatitis B virus infection (Phase I/II clinical trial in process). The
Company also has clinical experience with Ampligen in patients with certain
cancers including renal cell carcinoma (kidney cancer) and metastatic malignant
melanoma.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries BioPro
Corp., BioAegean Corp. and Core BioTech Corp. which were incorporated in
September 1994 for the purpose of developing technology for ultimate sale into
certain non-pharmaceutical specialty consumer markets. All significant
intercompany balances and transactions have been eliminated in consolidation.
In November, 1995, the Company completed an initial public offering (IPO) of
5,313,000 units of Hemispherx BioPharma, Inc. resulting in net proceeds of
approximately $15.8 million. Each unit consists of one share of the Company's
Common Stock and one Class A Redeemable Warrant, exercisable for one share of
Common Stock at $4.00 per share. These Class A Redeemable Warrants are subject
to redemption two years from November 2, 1995 at $.05 per warrant in the event
that the closing bid price of the Company's Common Stock exceeds $9.00 for a
specified time period. In connection with the IPO, the underwriter was granted
an option to purchase 462,000 units at $5.775 per unit.
The accompanying consolidated financial statements have been prepared on a
going concern basis which assumes the continuity of operations and the
realization of assets and liabilities in the ordinary course of business.
Since 1987, the Company has incurred substantial operating losses and could
incur losses over the next several years. The Company's cash requirements have
exceeded its resources due to its expenditures for research and development,
obtaining regulatory approvals, fees and expenses to prosecute and maintain its
patent estate, fees and expenses related to the initial public offering ("IPO")
and various general and administrative expenses. The Company's ability to
achieve profitable operations is dependent on successfully developing products,
obtaining regulatory approvals on a timely basis and making the transition from
a research and development firm to an organization producing commercial
products or entering into agreements for product commercializations. The
Company will need to produce income from cost recovery clinical trials in
Canada and Belgium and raise funds through equity or debt financings,
collaborative arrangements with corporate partners, off-balance sheet financing
or from other sources. The Company's ability to raise additional capital or
increase income from cost recovery programs will be a factor in the Company's
successful development of it's products. In the event that the proceeds from
the cost recovery clinical trials are delayed or that additional financing is
not available in 1997, the Company believes that it can restructure operations
to minimize cash expenditures, locate
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
a partner to share development costs and maintain the operation and protect the
value of its various patent rights.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash equivalents consist of money market, bank certificates of deposit,
and overnight repurchase agreements collateralized by money market securities
with original maturities of less than three months, with both a cost and fair
value of $11,291,167 and $5,279,429 at December 31, 1995 and 1996,
respectively.
(b) Property and Equipment
Property and equipment consist of furniture, fixtures, office
equipment, leasehold improvements and vehicles recorded at cost. Depreciation
and amortization is computed using the straight-line method over the estimated
useful lives of the respective assets, ranging from five to seven years.
Property and equipment held under capital leases are amortized on the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset.
Accumulated depreciation and amortization as of December 31, 1995 and 1996 is
$545,956 and $602,914, respectively.
(c) Patent and Trademark Rights
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight-line method over ten years. The Company reviews
its patents and trademarks periodically to determine whether they have
continuing value. Such review includes an analysis of the patent and
trademark's ultimate revenue and profitability potential on an undiscounted
cash flow basis to support the realizability of its respective capitalized
cost. In addition, management's review addresses whether the patent and
trademark continues to fit into the Company's strategic business plans. During
the years ended December 31, 1995 and 1996, the Company decided not to renew
patents in certain countries and has recorded $100,017 and $41,156
respectively, relating to the expense of writing off these patents as a charge
to research and development. Accumulated amortization as of December 31, 1995
and 1996 is $903,769 and $795,117, respectively. In addition the Company
wroteoff $240,743 of fully amortized patents and trademarks during 1996.
44 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
(d) Revenue
Revenue is recognized immediately for nonrefundable license fees when
agreement terms require no additional performance on the part of the Company.
Revenue from research and development is recognized when earned.
(e) Proforma Net Loss Per Share
Upon the closing of the IPO of common stock, all shares of Series A, B
and C Preferred Stock (Preferred Stock) converted into Common Stock. Proforma
net loss per share for the years ended December 31, 1994 and 1995 are
calculated by dividing net loss by the weighted average number of common shares
outstanding during the period after giving effect for Common Stock equivalents
arising from stock options and warrants and Preferred Stock assumed converted
to Common Stock. Pursuant to the requirements of the Securities and Exchange
Commission, Common Stock and Common Stock equivalents issued by the Company
during the twelve months immediately preceding the IPO have been included in
the calculation of the shares used in the calculation of pro forma net loss per
share (using the treasury stock method and the public offering price). The
following table sets forth the calculation of the total number of shares used
in the computation of pro forma net loss per share.
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
Weighted average common
shares outstanding 9,475,642 10,341,163 15,718,136
Incremental shares assumed to be
outstanding related to common stock,
stock options and warrants granted
and convertible preferred stock
based on the treasury stock
method. 2,060,634 3,858,538 --
---------- ---------- ---------
Weighted average common and common
stock equivalent shares used in
computation of proforma net loss per
common share 11,536,276 14,199,701 15,718,136
========== ========== ==========
(f) Accounting for Income taxes
Deferred income tax assets and liabilities are determined based on differences
between the financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The measurement of
deferred income tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits which are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.
45 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
(g) Sales of Subsidiary Stock
The Company intends to account for any sales of its subsidiaries' stock
as capital transactions. However, as of December 31, 1995 and 1996, the Company
owned 100% of each subsidiaries stock.
(h) New Accounting Pronouncements
The Company adopted the provisions of FASB No. 121, "Accounting for the
impairment of Long-Term Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
On January 1, 1996, the Company also adopted FASB No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply
the provisions of APB No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock options grants made in 1995
and future years as if the fair-value-based method defined in FASB No. 123 had
been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of FASB No.
123.
(i) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
(3) Notes Payable
Notes payable at December 31, 1995 consisted of a February, 1992
convertible note with detachable warrants due February 26, 1995, interest
payable quarterly at 12% per annum, as amended, in the amount of $4,920,000.
This note was paid in 1996 (Note 14).
46 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
(4) Stock-Based Compensation
In 1996, the Company granted 350,000 stock purchase warrants to certain key
employees in recognition of services performed and services to be performed.
The per share weighted average fair value of the stock purchase warrants
granted during 1996 was determined using the Black-Scholes option pricing model
with the following weighted average assumptions: expected dividend yield of
zero, risk free interest rate of 6.02%, volatility 39.71%, and an expected life
of two years.
The Company applies APB Opinion No. 25 in accounting for stock-based compensa-
tion of its employees and, accordingly, no compensation cost has been
recognized for stock purchase warrants issued to employees in the financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for its stock-based compensation of its employees the
Company's net loss would have been increased to the pro forma amount indicated
below:
1996
----
Net loss As reported $(4,554,489)
Pro forma (4,782,722)
There was no stock-based compensation for employees in 1994 and 1995.
(5) Accrued Expenses
Accrued expenses at December 31, 1995 and 1996 consists of the following:
December 31,
-------------
1995 1996
---- ----
Deferred rent . . . . . . . . . . . $ 228,189 $ --
Accrued payroll and benefits. . . . 144,047 126,296
Accrued interest (Note 14). . . . . 898,733 --
Accrued professional fees (Note 14). . . . 727,996 162,719
Accrued taxes, dividends, and other . . . 264,131 259,297
--------- --------
$2,263,096 $ 548,312
========= ========
(6) Stockholders' Equity
(a) Common Stock
The Company is authorized to issue 50,000,000 shares of $.001 par value Common
Stock. The Company declared a 1:2.17015 reverse stock split and change in par
value from the original $.01 par value to $.001 on shares of the Company's
Common Stock effective June 29, 1994. On November 30, 1994, the Company
effected a 2:1 forward stock split. On June 5, 1995 the Company changed its
name to Hemispherx BioPharma, Inc.
The accompanying consolidated financial statements reflect for all periods
presented the effect of the 1:2.17015 reverse stock split, 2:1 forward stock
split, and a change in par value to $.001 per common share.
47 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
(b) Common Stock Options and Warrants
(i) Stock Options
The 1990 Stock Option Plan provides for the grant of options to purchase up to
460,798 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisors, and other persons whose
contributions are important to the success of the Company. The recipients of
options granted under the 1990 Stock Option Plan, the number of shares to be
converted by each option, and the exercise price, vesting terms, if any,
duration and other terms of each option shall be determined by the Company's
board of directors or, if delegated by the board, its Compensation Committee.
No option is exercisable more than 10 years and one month from the date as of
which an option agreement is executed. These shares become vested through
various periods not to exceed four years from the date of grant. Certain shares
become vested upon the underwritten public offering concluded by the Company in
November, 1995. The option price represents the fair market value of each
underlying share of Common Stock at the date of grant, as determined by the
Company's board of directors.
Information regarding the options approved by the Board of Directors under
the 1990 Stock Option Plan is summarized below:
December 31
--------------
Option
price 1995 1996
Outstanding, beginning of year. . . $ .11-4.34 285,620 232,830
Granted . . . . . . . . . . . . . . 3.50-4.34 0 2,123
Canceled. . . . . . . . . . . . . . .11-4.34 (52,790) 0
---------- ------- -------
Outstanding, end of year. . . . . . $1.07-4.34 232,830 234,953
========== ======= =======
Exercisable . . . . . . . . . . . . 165,244 215,161
======= =======
Exercised in prior years. . . . . . (10,576) (10,576)
======= =======
Available for future grants . . . . 217,392 215,269
======= =======
The outstanding options include the right to purchase 45,344 shares of the
Company's Common Stock at $3.50 per share.
In December 1992, the Board of Directors approved the 1992 Stock Option Plan
(the 1992 Stock Option Plan) which provides for the grant of options to
purchase up to 92,160 shares of the Company's Common Stock to employees,
directors, and officers of the Company and to consultants, advisers, and other
persons whose contributions are important to the success of the Company. The
recipients of the options granted under the 1992 Stock Option Plan, the number
of shares to be covered by each option, and the exercise price, vesting terms,
if any, duration and other terms of each option shall be determined by the
Company's board of directors. No option is exercisable more than 10 years and
one month from the date as of which an option agreement is executed. To date,
no options have been granted under the 1992 Stock Option Plan.
The Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan) was
approved by the board of directors in July 1993. The outline of the 1993
Purchase Plan provides for the issuance, subject to adjustment for capital
changes, of an aggregate of 138,240 shares of Common Stock to employees.
48 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
The 1993 Purchase Plan will be administered by the Compensation Committee of
the board of directors. Under the 1993 Purchase Plan, Company employees will be
eligible to participate in semi-annual plan offerings in which payroll
deductions may be used to purchase shares of Common Stock. The purchase price
for such shares will be equal to the lower of 85% of the fair market value of
such shares on the date of grant or 85% of its fair market value of such shares
on the date such right is exercised. There have been no offerings under the
1993 Purchase Plan to date and no shares of Common Stock have been issued
thereunder.
(ii) Warrants
The warrants outstanding at December 31, 1996, related to the issuance of
former notes payable and shareholder notes payable (Note 3) which were
exercisable in either Common Stock, Series B or Series C Preferred Stock and
subject to certain antidilution adjustments. Upon completion of the IPO, these
warrants became exercisable only in Common Stock.
Common Stock
--------------------
Exercise Number of
Price Shares Expiration
Notes payable: -------- --------- ----------
February 1992 5 years
convertible note (see Note 14) . . .$10.85 119,807 from
" " " . . $2.00 160,000 IPO date
Stockholders notes:
Stockholders . . . $3.50 292,160 Oct. 1999
Stockholder. . . . $3.50 300,000 Oct. 1999
Stockholders . . . $3.50 35,830 Dec. 1997
Stockholders . . . $2.00 144,000 Dec. 1997
Stockholder. . . . $1.75 75,000 Mar. 2000
Stockholder. . . . $3.50 10,000 Mar. 1999
---------
Subtotal: 1,136,797
=========
(iii) Other Warrants
In addition, the Company has issued other warrants outstanding - totalling
14,184,000 which consists of the following:
In November, 1994, the Company granted Rule 701 Warrants to purchase an
aggregate of 2,080,000 shares of Common Stock to certain officers and
directors. These Warrants are exercisable at $3.50 per share and, if not
exercised, expire in September, 1999.
From February through April 1995, the Company executed Bridge Loan Agreements
and promissory notes with 17 accredited lenders totaling $1,500,000. These
notes required interest at 8% per annum and were paid on the closing date of
the IPO. Interest has been imputed at 12% and is recognized as interest expense
and additional paid in capital in 1995 to reflect the issuance of additional
warrants to reflect the reduction in interest. Such agreements also included
various affirmative and negative
49 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
covenants. As additional consideration, the lenders had options to purchase
1,000,000 bridge units issuable upon the effective date of the IPO at an
exercise price of $.50 for a period of five years. Management believes these
sales are a good measure of fair value because they represent the only notable
third-party sales of Common Stock in 1994 and 1995, prior to the IPO. Such
exercise price is estimated to be at fair market value at the date of issuance
based on the then recent sales of securities to third-parties. Each bridge unit
consists of one share of Common Stock and one Class A Redeemable Common Stock
Purchase Warrant exercisable at $4.00 per share. 797,917 units were exercised
in 1995 and 202,083 were exercised in 1996 at $.50 per unitt.
in May, 1995, the Company and certain officers, directors and shareholders
entered into a standby finance agreement pursuant to which the parties agreed
to provide an aggregate of $5,500,000 in financing to the Company during 1995
in the event that existing and additional financing was insufficient to cover
the cash needs of the Company through December 31, 1995. In exchange, the
Company issued warrants to purchase an aggregate of 2,750,000 shares of Common
Stock at $1.75 per share to the parties. In September, 1995, the parties to
this standby agreement agreed to extend their obligations through December 31,
1996.
In June 1995, the Company entered into an agreement with The Sage Group
whereby, in return for identifying certain distribution partners, The Sage
Group will receive certain percentages of the proceeds from the first
distribution agreement arising from such identification. In addition, the
Company will pay to The Sage Group a monthly retainer and has given warrants to
purchase 100,000 shares of Common Stock at an exercise price of $1.75 share. In
May, 1996, additional warrants to purchase 140,000 shares of Common Stock were
issued at an exercise price of $3.50.
In connection with the IPO completed on November 7, 1995, the Company sold
5,313,000 units. Each unit consisted of one share of common stock and one
Class A Redeemable Warrant exercisable at $4.00 per share.
Also, as part of the underwriting agreement, the underwriter received warrants
to purchase 462,000 shares of common stock at $5.775 per share as well as
462,000 Class A Redeemable Warrants to purchase common stock at $6.60 per
share.
These warrants expire five years from the date of the IPO.
1,877,000 warrants have been granted to other parties, stockholders and
employees for services performed. These warrants are exercisable at rates of
$2.50 to $4.00 per warrant.
(iv) Subsidiary Warrants
In May 1995, the officers and directors of BioAegean Corp. were elected and
approved. The board of directors approved the issuance of 6,000,000 shares of
Common Stock, of which 1,000,000 shares are to be offered for sale to certain
investors at $1.00 per share. In addition, the directors approved options for
directors and officers totaling 1,200,000 shares at an exercise price of $1.00.
In consideration for licensing certain patents, the board authorized 1,000,000
shares of common stock to be issued to Hemispherx BioPharma, Inc., options for
an additional 1,000,000 shares of common stock at the lesser of the initial
public offering price of BioAgean Corp. or $5.00 per share and 10,000 shares of
Preferred stock to Hemispherx BioPharma, Inc. Only the common stock shares of
Hemispherx BioPharma, Inc have been issued as of December 31, 1995 and 1996.
50 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
The Company has granted certain rights to the debtholders to have their
securities registered under the Act. The Company believes the warrants have a
value which is not material for purposes of the financial statements and
accordingly, no value has been attributed to these warrants in the accompanying
consolidated financial statements.
(7) Series D Convertible Preferred Stock
On July 3, 1996 the Company issued and sold 6,000 shares of Series D
Convertible Preferred Stock ("the Preferred Stock") at $1,000 per share for an
aggregate total of $6,000,000. The proceeds, net of issuance costs, realized
by the Company were $5,395,885. In addition to the issuance of the Preferred
Stock, the Company issued to the buyer Warrants ("the Warrants") to purchase
100,000 shares of Common Stock at the strike price of $4.00 per share.
The Preferred Stock earns dividends at the rate of $50 per annum per share as
declared by the Board of Directors of the Corporation. The dividends are
cumulative and payable quarterly commencing October 1, 1996 in cash or common
stock at the election of the Company. In October, 1996, the Preferred
Shareholder converted 1,000 shares of Series D Convertible Preferred stock into
376,530 shares of common stock.
On September 16, 1996 the Company's registration statement registering the
common stock underlying the Preferred Stock and the Warrants was declared
effective by the SEC.
(8) Research, Consulting and Supply Agreements
The Company has entered into various clinical research agreements for the
purpose of undertaking clinical evaluations of the safety and efficacy of
Ampligen. The Company's obligation under these agreements is primarily
dependent on the number of actual patients enrolled in the study. During the
years ending December 31, 1994, 1995 and 1996, the Company incurred
approximately $247,000, $179,000 and $179,000 respectively, of research fees
under these agreements.
In August, 1988, the Company entered into a pharmaceutical use license
agreement with Temple University (the Temple Agreement). In July, 1994, Temple
terminated the Temple Agreement. In November, 1994, the Company filed suit
against Temple in the Superior Court of the State of Delaware seeking a
declaratory judgement that the agreement was unlawfully terminated by Temple
and therefore remained in full force and effect. Temple filed a separate suit
against the Company seeking a declaratory judgement that its agreement with
the Company was properly terminated. These legal actions have now been settled.
Under the settlement, the parties have entered into a new pharmaceutical use
license agreement (New Temple Agreement) that is equivalent in duration and
scope to the previous license. Under the terms of the New Temple Agreement,
Temple granted the Company an exclusive world-wide license for the term of the
agreement for the commercial sale of Oragen products using patents and related
technology held by Temple, which license is exclusive except to the extent
Temple is required to grant a license to any governmental agency or non-profit
organization as a condition of funding for research and development of the
patents and technology licensed to the Company. (Note 14).
51 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
The Company has entered into agreements for consulting services which are
performed at certain institutions and by certain individuals. The Company's
obligation to fund these agreements can generally be terminated after the
initial funding period, which generally ranges from one to three years or on an
as-needed monthly basis. During the years ending December 31, 1994, 1995 and
1996, the Company incurred approximately $130,000, $87,000, and $188,000
respectively, of consulting fees under these agreements.
In 1987, the Company entered into an agreement (the ``Supply Agreement'')
to purchase $2.7 million of compounds used in the manufacture of Ampligen which
expired in December 1992. Pursuant to the terms of the Supply Agreement, the
Company agreed to pay royalties of .5% of net sales, subject to certain minimum
and maximum requirements, for 5 years to the supplier of raw materials for the
manufacture of Ampligen.
In September 1995, the Company entered into an agreement with Rivex Pharma
Inc., (``Rivex''), pursuant to which Rivex will provide various services in
connection with the marketing and exclusive distribution of Ampligen in Canada
on an emergency drug release basis. Under the terms of this agreement, the
Company will supply and Rivex will purchase as much Ampligen as necessary to
satisfy Rivex's customers at a mutually agreed upon cost. In return, Rivex will
retain the exclusive right to market and distribute Ampligen in Canada.
(9) 401(K) Plan
In December 1995, the Company established a defined contribution plan,
effective January 1, 1995, the Hemispherx BioPharma Employees 401(K) Plan and
Trust Agreement (the 401(K) Plan). All full time employees of the Company are
eligible to participate in the 401(K) Plan following one year of employment.
Subject to certain limitations imposed by federal tax laws, participants are
eligible to contribute up to 15% of their salary (including bonuses and/or
commissions) per annum. Participants' contributions to the 401(K) Plan may be
matched by the Company at a rate determined annually by the Board of Directors.
Each participant immediately vests in his or her deferred salary contributions,
while Company contributions will vest over one year. In 1995 the Company
provided matching contributions to each employee for up to 6% of annual pay or
$25,500. The Company also absorbed the cost of employee contributions of
$25,500. In 1996 the Company provided matching contributions to each employee
for up to 6% of annual pay or $31,580.
(10) Vendor Agreements
On February 20, 1996, the Company entered into an agreement to amend the lease
for its principal office. For a payment of $85,000 all outstanding rent and
charges accrued through December 31, 1995 were forgiven by the landlord. The
term of the lease was extended through April 30, 2000 with an average rent of
$14,507 per month, plus applicable taxes and charges. Note 12, leases,
reflects these new terms. As result of this settlement and the amended lease
the Company recorded a $318,757 credit adjustment in earnings due to the
reduction in accrued and deferred rent liabilities. The credit is reflected as
a reduction of general and administrative expenses.
52 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
(11) Royalties, License, and Employment Agreements
The Company also has entered into a licensing agreement with a group of
individuals and Hahnemann University relating to their contributions to the
development of certain compounds, including Ampligen, and to obtain exclusive
information and regulatory rights relating to these compounds. Under this
agreement, the Company will pay 2% of net sales proceeds of Ampligen not to
exceed an aggregate amount of $6 million per year through 2005.
As described in Note 8, the Company has agreed to pay royalties under the
Temple Agreement and to its supplier of raw materials.
The Company has contractual agreements with four of its officers. The aggregate
annual base compensation under these contractual agreements for 1994, 1995,
1996 is $576,000, $540,000 and $589,552 respectively. In addition, certain of
these officers are entitled to receive performance bonuses of up to 25% of the
annual base salary (in addition to the bonuses described below). Pursuant to
the employment agreements, certain officers were granted options under the 1990
Stock Option Plan to purchase an aggregate of 82,942 shares of the Company's
Common Stock at exercise prices ranging from $2.72-$4.34 and Rule 701 Warrants
to purchase 2,000,000 shares of Common Stock at $3.50 per share. One of the
employment agreements provides for bonuses based on gross proceeds received by
the Company from any joint venture or corporate partnering agreement.
In October 1994, the Company entered into a licensing agreement with Bioclones
(Propriety) Limited (SAB/Bioclones) with respect to codevelopment of various
RNA drugs, including Ampligen, for a period ending three years from the
expiration of the last licensed patents. The licensing agreement provides
SAB/Bioclones with an exclusive manufacturing and marketing license for certain
southern hemisphere countries (including certain countries in South America,
Africa and Australia) as well as the United Kingdom and Ireland (the licensed
territory). In exchange for these marketing and manufacturing rights, the
licensing agreement provides for: (a) a $3 million cash payment to the Company,
all of which was recorded during the year ended December 31, 1995; (b) the
formation and issuance to the Company of 24.9% of the capital stock of
Ribotech, a company which develops and operates a new manufacturing facility
by SAB/Bioclones, and (c) royalties of 6% to 8% of net sales of the licensed
products in the licensed territories as defined, after the first $50 million of
sales. SAB/Bioclones will be granted a right of first refusal to manufacture
and supply to the Company licensed products for not less than one third of its
world-wide sales of Ampligen, excluding SAB/Bioclones related sales. In
addition, SAB/Bioclones will have the right of first refusal for oral vaccines
in the licensed territory. Prepaid expenses and other current assets, as of
December 31, 1996, includes a $47,370 receivable from Ribotech.
In October 1994, the Board of Directors granted a director of the Company the
right to receive 3% of gross proceeds of any licensing fees received by the
Company pursuant to the SAB licensing agreement, a fee of .75% of gross
proceeds in the event that SAB makes a tender offer for all or substantially
all of the Company's assets, including a merger, acquisition or related
transaction, and a fee of 1% on all products manufactured by SAB. The Company
may prepay in full its obligation to provide commissions within a ten year
period.
On December 5, 1995, the Company retained the law firm of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump) to provide general legal counsel, advise and
representation with respect to various United
53 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
States regulatory agencies. Initially, Akin, Gump will provide representation
before the Food and Drug Administration (FDA). In addition, the agreement
allows for incentive payments for obtaining a letter from the FDA evidencing
Ampligen's approvability for HIV disease treatment.
(12) Leases
The Company has several noncancelable operating leases for the space in
which its principal offices are located and certain office equipment. See Note
10 above.
Future minimum lease payments under noncancelable operating leases are as
follows:
Year ending Operating
December 31, leases
- ----------- ---------
1997. . . . . . . . . . . . . . . . . . . . $ 271,793
1998. . . . . . . . . . . . . . . . . . . . 280,413
1999. . . . . . . . . . . . . . . . . . . . 292,146
2000. . . . . . . . . . . . . . . . . . . . 91,517
---------
Total minimum lease payments . . . . . . $ 935,869
=========
Rent expense charged to operations for the years ended December 31, 1994,
1995 and 1996 amounted to approximately $173,000, $289,000 and $286,000
respectively. The Company recognized rent expense on a straight-line basis over
the lease term, and the difference between rent expense on a straight-line
basis and the base rental was deferred and included in accrued expenses at
December 31, 1995.
(13) Income Taxes
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $44,600,000 for Federal and state income tax
which expire over various years through 2011. In addition, for Federal income
tax purposes, the Company has approximately $6,900 of unused investment and job
tax credits available to offset future taxes, if any, expiring 1998 through
1999.
The expiration dates of the net operating loss carryforwards are as follows:
Expiration Tax loss
date carryforwards
- ---- ------------
1999. . . . . . . . . . . . . . . . . . . . $ 130,974
2003. . . . . . . . . . . . . . . . . . . . 1,773,967
2004. . . . . . . . . . . . . . . . . . . . 5,402,521
2005. . . . . . . . . . . . . . . . . . . . 3,534,484
2006. . . . . . . . . . . . . . . . . . . . 8,749,039
Thereafter. . . . . . . . . . . . . . . . . 24,982,813
-----------
$44,573,798
===========
54 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
If certain substantial changes in ownership should occur there would be an
annual limitation on the amount of tax attribute carryforwards which can be
utilized in the future.
The Company has provided a valuation allowance against all of its deferred tax
assets.
(14) Contingencies
The Company was a defendant in a lawsuit instituted in 1991 by participants in
a double-blind placebo-controlled clinical trial of Ampligen therapy for
ME/CFS. The plaintiffs alleged that the Company or its alleged agents promised
them that they would receive Ampligen after the placebo-controlled study at no
cost for periods ranging from ``until marketable'' to ``for life.'' Plaintiffs
sought compensatory and punitive damages. The court granted the Company's
motions for summary judgment upon all claims alleged by the plaintiffs in this
case. The plaintiffs have appealed from these orders before the United States
Court of Appeals for the Ninth Circuit. In January 1996, the Court of Appeals
denied their appeal and sustained the Company's position. On the basis of the
Court of Appeals favorable decision, the Company believes the lawsuit will not
have a material effect on the Company.
In February 1991, a university advised the Company of its position that
employees of the university were the inventors of an issued U.S. patent
regarding the use of Ampligen in combination with various other agents (in-
cluding AZT) for the treatment of HIV infection. As issued, this patent names
the Company's Chief Executive Officer as sole inventor and the Company as sole
assignee. The university has demanded that the patent be reissued naming the
university's employees as inventors and the university as assignee. The Company
has refused to take such action. No formal claim has been filed by the univer-
sity. If such claim were filed and if such claim were found to have merit, the
loss of the patent at issue would not have a materially adverse effect on the
Company's long-range business since the university would only be able to limit
and/or prevent the Company's use of Ampligen in combinations with AZT in the
treatment of HIV.
In August 1988, the Company entered into a pharmaceutical use license
agreement with Temple University. Under the terms of the agreement, Temple
granted the Company an exclusive world-wide license for the commercial sale of
Oragen products using patents and related technology held by Temple until the
last to expire of any related patents then or thereafter issued. In July 1994,
Temple terminated the agreement. In November,1998, the Company filed suit
against Temple in the Superior Court of the state of Delaware seeking a
declaratory judgement that the agreement was unlawfully terminated by temple
and therefore remained in full force and effect. Temple filed a separate suit
against the Company seeking a declaratory judgement that its agreement with the
Company was properly terminated. In December, 1996, these legal actions were
terminated. Under the settlement, the parties have entered into a new
pharmaceutical use license agreement that is equivalent to the original
agreement in duration and scope.
In March 1995, the Company instituted a declaratory judgment action against the
February 1992 noteholder of a $5 million convertible note and a second
defendant in the United State District Court for the Eastern District of
Pennsylvania (``the Pennsylvania action'') to declare as void, set aside, and
cancel the February 1992 convertible note between the Company and the
noteholder (``the Note''). In addition, the noteholder instituted suit against
the Company on the Note in the Circuit Court of the 15th Judicial District in
and for Palm Beach County, Florida, seeking judgment on the note, plus
attorneys fees, costs
55 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
and expenses; in August 1995, this action was stayed by the Florida Court
pending the outcome of the Pennsylvania action. The noteholder also filed a
motion for a preliminary injunction in the Pennsylvania court to enjoin the
Company from disbursing the proceeds of a public offering in the amount of $5.8
million, which motion was granted in November, 1995. On February 15, 1996, the
Company reached an agreement to settle this matter. Terms and conditions of
the settlement include payment of $6,450,000 to the noteholder to cover the
note balance and legal expenses. The noteholder and related parties are to
maintain certain Warrants that were granted prior to the lawsuit. Other
Warrants granted to the noteholder in the note restructuring in 1994 were
relinquished. The funds under this settlement were paid on March 21, 1996 and
charged to the note payable, accrued interest and accrued professional fees.
Mutual releases were executed which completed the settlement of the litigation.
The Company is subject to claims and legal actions that arise in the ordinary
course of their business. Management believes that the ultimate liability, if
any, with respect to these claims and legal actions will not have a material
effect on the financial position or results of operations of the Company.
(15) Subsequent Event (Unaudited)
In March, 1997, the Company used the services of an investment banking firm to
privately place $5 million of Series E Convertible Preferred Stock. The
proceeds from this placement were used to retire the $5 million balance of
Series D Convertible Stock issued in July of 1996. As a result of this
transaction in 1997, the Company will incur a $1.2 million stock compensation
expense, however, this will have no effect on the net equity of the company as
it will be offset by an increase in additional paid-in capital.